Broken Symmetry

"Everything is flowing" in Yosemite

Everything is flowing -- going somewhere, animals and so- called lifeless rocks as well as water. Thus the snow flows fast or slow in grand beauty-making glaciers and avalanches; the air in majestic floods carrying minerals, plant leaves, seeds, spores, with streams of music and fragrance; water streams carrying rocks... While the stars go streaming through space pulsed on and on forever like blood...in Nature's warm heart.

- John Muir

Unfortunately, smoke from wildfires that started as a controlled burn have turned normally blue skies into a nearly impenetrable brown and gray haze. Interesting fact: sequoia trees have adapted to live and reproduce best with forest fires burning through their groves every three to eight years.

Suppose we imagine the economy as an ecosystem. What would be the equivalent of the sequoia?

Welcome Back to the IP Asset Maximizer Blog

Just a note to readers that Jackie Hutter's IP Asset Maximizer Blog is back and running after a delightful facelift, putting artistically challenged bloggers such as myself to shame. I especially enjoy the sunflower theme of her new blog. Here's a fun sunflower fact from Wikipedia:

What is usually called the flower is actually a head (formally composite flower) of numerous florets (small flowers) crowded together.

Welcome back, Jackie! We look forward to reading more excellent posts on IP strategy.

Silly Physicist! Bubbles Need Financing

From the WSJ:

At the summit of the Group of Eight leading nations in L'Aquila, Italy, next week, Ms. Merkel will urge leaders including U.S. President Barack Obama to rein in ballooning budget deficits as soon as the recovery allows, or risk another debt crisis.

She has also called on central banks to reverse their unorthodox measures to increase borrowing and lending once the paralysis in credit markets eases.

Normal, prudent policies should return once economic activity rebounds to its level before last year's downturn, Ms. Merkel says. "Then it will be important for us to take care that we don't set up the next crisis right away by taking too-high risks," Ms. Merkel said in her airy, modern chancellery office overlooking the Reichstag parliament building.

Hmm... Didn't she learn any economics? What about Keynes?

Ms. Merkel, a 54-year-old former particle physicist who grew up in communist East Germany, is strong favorite to remain in office after German elections on Sept. 27.

Well that explains it. I guess she expects actual data to support her economic theories! Actually, I think the WSJ may have gotten this slightly wrong. She is a Physical Chemist.

Via ThinkMarkets.

Happy Independence Day

Before all things I am reminded as I go along, that this day, the birthday of our republic, demands our filial acknowledgments. A day now at length auspicious, since by the establishment of our new constitution we have the fair prospect of enjoying those good things, for which we have had so hard a contest. Indulge, I pray you, the effusion of my heart, which gratulates itself on this occasion. Feel, with me, the transports which I cannot but feel, when every letter from America brings confirmation of the public happiness, and announces some additional cement to our national union, or some useful exhibition of national authority. The opposition sickens with mortal symptoms, and I hope and trust, that our countrymen will have the wisdom to wait, before they attempt amendments, for those lights of experience, which are the only guides that can pretend to infallibility.

From Gouverneur Morris in a letter to William Carmichael on July 4, 1789.

How to Get Toxic Assets Moving Like Hotcakes?

One of the problems with pricing the derivatives books at banks is that nobody wants to go first and then lose their shirt if it turns out they got their valuation wrong. And these suckers are nearly impossible to value now that we know that our theory of valuation was catastrophically wrong. So what do you do?

Well one idea is to recognfigure credit-default swaps into providing negative feedback rather than positive feedback to prices:

This analogy can help us figure out how much capital large financial institutions should be required to keep on hand. The answer: an LFI will have to post enough collateral (equity) to insure that its liabilities are always paid in full. When the fluctuation in the value of the underlying assets puts creditors at risk, the LFI's equity holders will be faced with a margin call: They will either have to inject new capital or lose their equity. In both cases the creditors will be protected.

The main difference between margin calls and our new capital requirement system is the trigger mechanism. In a margin account, the broker looks at the value of the investments (which is easily determined since all assets are traded) and compares the value of the collateral posted with the possible losses the position might have in the following days. Creditors of LFIs, however, are often dispersed and so unable to coordinate to make a margin call. And since most LFI assets, such as commercial loans and home equity lines, are non-standardized and not frequently traded, their value is hard to assess. Another mechanism will be needed to determine when the margin is too thin.

One possibility is to leave the decision of when to make a margin call in the hands of a regulator. However, the risk here is twofold. Either the regulator is powerful, leaving financial institutions exposed to the risk of abuse, or the regulator is weak and will be unduly influenced by failing institutions and intervene too late.

Regulators should therefore rely on a market-based trigger: a credit default swap (CDS). Despite being viewed by many as a "financial weapon of mass destruction," CDSs are like any tool that can be used wisely or foolishly. In this context, they are potentially some of the best regulatory instruments available. A credit default swap on an LFI is an insurance claim that pays off if that institution fails and creditors are not paid in full. Since the CDS is a "bet" on the institution's strength (or weakness), its price reflects the probability that the LFI debt will not be repaid. Such CDSs, in essence, indicate the risk that a large financial institution will fail.

In our mechanism, when the CDS price rises above a critical value (indicating that the institution has reached an unacceptable threshold of weakness), the regulator would force the LFI to issue equity until the CDS price and risk of failure back down. If the LFI fails to do this within a predetermined period of time, the regulator will take over.

This regulatory takeover would not be dissimilar to a milder form of bankruptcy, and it achieves all the other goals of bankruptcy -- discipline on management and shareholders -- without imposing any of the systemic costs.

Larry Summers should like this idea. It fits very well with his principles of regulatory systems design.

The proposal is from Oliver Hart and Luigi Zingales. Good creative thinking.

Ocean Tomo Spring 2009 Live Auction in San Francisco

I will be in attendance on Thursday and Friday. Shoot me an email if you're interested in meeting up.

IP Business Congress 2009

Be there or be square:

From 21st to 23rd June 2009, global IP thought leaders will be gathering to attend the second IP Business Congress, hosted by Intellectual Asset Management (IAM) magazine. To be held at the Four Seasons Hotel in Chicago, the IP Business Congress is designed specifically to meet the needs of senior business executives responsible for the creation and management of IP value inside corporations, as well as those who advise them.

Duncan Bucknell has already declared "#IPBC09" as the code word for tweets at the event.

Please shoot me an email if you'll be there and would like to meet up.

Famous last words?

From Gary Becker:

The Chinese government holds most of its more than $2 trillion in official reserves in US Treasury securities. China gets a bad deal from selling goods made by Chinese labor and capital in exchange for large amount of paper assets that yield low returns. China has accumulated far more reserves in the form of these assets than can be justified as a buffer against fluctuations in its imports and exports, or than is wise given its low standard of living. The US seems to have made the better bargain by exchanging low interest paper assets for a rich variety of consumer and producer goods.

I hope we still feel that way ten years from now. But somehow I doubt that will be the case. My twin brother is a fluent Mandarin speaker. I studied Homeric Greek. What was I thinking?

Innovation in Idaho

Tech Transfer Tactics reports:

Mahoney envisions multiple revenue sources for I-Cubed, including selling IP and taking a percentage, negotiating royalty agreements with public partners, buying ownership stakes in companies that receive funding, and charging a percentage for managing the investment fund. The clearinghouse would employ a sales and marketing team to market Idaho technology globally. Most licensing revenues would be returned to the source company or institution. Although all three state universities have tech transfer departments, they must “go back to the legislature every year for more [funding], which doesn’t breed consistency,” says Brian Dickens, administrator of the Idaho Department of Commerce’s Commercial Innovation Division. Universities have been thus far receptive to I-Cubed, whose business model “seems to supplement efforts that are already underway here and other places,” says Mary Givens, TTO director at Boise State University. “Once it is up and running, Boise State will look for ways we can work together.”

Sounds like a great idea to me. I'd say that even more established tech transfer offices would be interested in that sort of partnership if I didn't know better from personal experience. But the real story here is the innovative source of funding -- a great example of creative entrepreneurship:

I-Cubed is seeking foreign investment under the federal EB-5 immigration program, which grants visas to foreigners in exchange for committing at least $500,000 to rural or high-unemployment areas and $1 million to urban areas for at least two years.

This is a terrific way to foster the growth of human capital here in the U.S.

Keynote from FTC Commissioner J. Thomas Rosch: a Dynamic Analysis of Innovation Markets

In a pleasant turn of events, the most provocative remarks from day one of the IP & Antitrust Conference were provided by neither a practitioner nor an academic, but by FTC Commissioner Tom Rosch. A PDF of Commissioner Rosch's remarks is available from the FTC here.

Commissioner Rosch took as his topic the question of whether and to what extent restraints affecting pure innovation markets should be challenged by regulators. In considering the question, he undertook a review of academic literature, the history of regulation of such markets, the practical problems encountered throughout that history, and the prominent legal issues raised in that history.

His review of the academic literature recounted Schumpeter's arguments in favor of concentration in innovation markets and Arrow's arguments in favor of more competition in such markets. His purpose was not to deal with the nuances of these authors' work, but rather to point out that views are divided within the academy as to what level of concentration or competition is best to foster innovation. His remarks called to my attention the extraordinary remarks of Justice Scalia in the 2004 Trinko decision:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices–at least for a short period–is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.

Commissioner Rosch insisted that this was dicta in the Trinko decision. Nonetheless it is a clear statement of what would be called a Schumpeterean view of competition in innovation markets.

Next came a summary of the last few decades of the history of regulation of innovation markets. Commissioner Rosch is an eyewitness to much of this history. He was working at the FTC, for example, when Xerox was investigated in 1974 on the theory that its patent portfolio and joint venture with another company were anticompetitive. His conclusion, however, was that through this history, there was not a single instance in which the agency had made a successful challenge to allegedly anticompetitive conduct in an innovation market.

Commissioner Rosch left off his survey of the regulation of innovation markets with the provocative observation that innovation is "necessarily dynamic and evolving" and that static market definitions (such as the definitions required under Philadelphia Bank or the 2 year rule under the guidelines for review of horizontal restraints) make no sense in such markets.

Regular readers of Broken Symmetry will appreciate how these words struck a chord with me. Only a few weeks ago we enjoyed hearing from guest blogger Michael A. Gollin about the importance of a dynamic equilibrium approach to understanding IP. Without competition regulatory authorities onboard with any industry plan to plant a new redwood forest, it is only too likely that industry agreements to conserve or preserve certain resources will be challenged as anticompetitive conduct ("You logging companies can't agree to stop other companies from cutting down those trees!").

The challenge has now been laid down by Commissioner Rosch. It is up to this generation of academics, practitioners, and regulators to rethink how we regulate markets to accommodate growth that occurs on a week-to-week basis rather than a year-to-year or decade-to-decade basis. What new standards can be applied to harmonize the goals of antitrust and IP law? How can academics make a dynamic theory of innovation easy enough for everybody involved -- business people, politicians, and the public -- to agree and buy in to a new model?

At the meeting, Commissioner Rosch specifically implicated the market definition rule as an unnecessary distraction to determining whether anticompetitive conduct has occurred in an innovation market. How can such markets be well-defined when they are so rapidly changing? He pointed to an interchange between Judges Douglas Ginsburg and Diane Wood on this question, although I didn't quite catch whether this was on the record for them. (They sit on different courts, but both teach at the University of Chicago.)

Here are a few of my own thoughts on these matters: besides market definition, even market share is not a meaningful figure if such markets are considered at only a single moment in time. Moving from a static to a dynamic picture of IP and Antitrust will require us to take multiple snapshots in time. Unfortunately, what we have going against us in setting up a new model are the facts that dominant mental models of economic equilibrium are time-independent and the accounting theory behind our financial statements is based on a static model of firm value in liquidation.

In the future, time-dependent measures, such as cash-flow per unit time, will provide a more reliable way to measure the effect of a given activity within an innovation market. The effect of given activities might even be deconvoluted out of a time-series of cash flows -- i.e., by looking at how growth curves of accounts inside various firms changed (or didn't change) as the result of a questionable activity, we might be able to tell whether that activity had an anticompetitive effect.

So for example, it might make more sense to gather statistics on the average internal rate of return for successful and unsuccessful startups in a given market. Perhaps only startups over a certain minimum IRR and annual revenue should be subject to antitrust scrutiny. Growth below that threshold (which probably is technology dependent; consumer internet IRRs are right now much higher than semiconductor IRRs) is not subject to review because it is unlikely to have been due to collusion.

Moreover, competition regulatory authorities should take into account how macroeconomic factors (such as the economic inaccessibility of IPOs for companies with under several hundred million dollars in revenue) can influence competition. In fact, if the FTC really wanted to promote competition, then the first thing it should do is sit down with the SEC and identify exactly who each agency seeks to protect, and what rules are designed to do that. As Hume would have said, whatever remains should be cast to the flames. Technological change has happened fast enough so that incremental changes to the regulatory regimes within these agencies will probably not get the job done.

Example of How Evidence can Undermine Bad Reasoning

Provided by Karl Rove in today's WSJ:

Mr. Obama's changes could overload Chief of Staff Rahm Emanuel. As power that was once diffused to cabinet officers is centralized in the White House, Mr. Emanuel will have to make more decisions and referee more turf wars than his predecessors. This will test his skills and likely inject chaos into the policy process as he prioritizes the decisions he can reasonably make.

Mr. Obama's tendency to work late into the night will also pose problems. Politico.com reports that the White House staff is "preparing for a return to long nights, heavy weekend shifts." Requiring a senior staff that meets at 7:30 a.m. to work until 11 p.m. or 12 a.m. will quickly cause burnout and diminish the quality of advice and oversight.

How is spending more time and listening to more points of view going to centralize decisionmaking and diminish the quality of advice and oversight? Rove gives us more actual insight into the management problems of the Bush administration through this criticism of Obama than we've gotten from any of Bush's critics.

Thank you to Michael A. Gollin

It's been a pleasure to have Michael A. Gollin as a guest here at Broken Symmetry, and I want thank him for sharing his thoughts with readers. Please do make sure to grab a copy of Driving Innovation so that you can benefit more from his insights.

I'm glad that Michael brought up Lincoln again, because I think we agree that his insights on the patent system, although nearly 150 years old to the day, remain a sound basis for our new President to rely upon in considering various patent reforms. In the lecture he gave on Inventions and Discoveries in Jacksonville, Illinois on February 11, 1859, Lincoln declared that:

All nature -- the whole world, material, moral, and intellectual -- is a mine; and, in Adam's day, it was a wholly unexplored mine. Now it is the destined work of Adam's race to develope, by discoveries, inventions, and improvements, the hidden treasures of this mine.

In Driving Innovation, in addition to the metaphor of an engine, you chose to describe the flow of innovation as an "innovation forest." The innovation forest is naturally closer to the ecosystem I had in mind in my reply to your first post. Innovation is not a sterile, individualistic enterprise. Ideas evolve healthiest and fastest in an organic, collaborative and competitive scramble in which new ideas are given resources and protection and older ideas are left alone to be used as a resource directly, or to provide indirectly through their decay into the commons a rich soil for new growth.

In fact, I believe your metaphor is an improvement on Lincoln's mine. From our perspective 150 years on, it is obvious that the natural world (including minerals), are not the bottomless pit that they might have seemed to us in the mid-19th Century. Indeed, there is now a broad consensus that our use of natural resources must be made with an eye toward their soon exhaustion.

How fortunate we are the ideas are more like trees than like minerals! When our minerals and fossil fuels are exhausted, there will be no way for us to replace them in our generation. But with an eye toward the future, and with careful planning, we could someday ensure that we do not use up our living resources before they can be replaced.

Beginning around the time of Lincoln, the incentives of the patent system helped to grow a redwood forest of ideas in the United States. On my view, we have been clearcutting from that forest for the last few years. There is nothing wrong with harvesting part of the bounty of what nature has provided us. But such harvesting should be done with an eye toward leaving enough for the forest to flourish on into the future, so that others may enjoy its benefits after us.

I like the idea that as a patent lawyer, I am a steward of that kind of national and natural treasure. I like your idea of a National Innovation Council, which could assist with determining what parts of the forest are in need of more fertilizer, and which need a brush fire to clear out the dead waste. Perhaps the innovation forest has grown too complex to be regulated under a single set of rules. We would not expect a redwood forest to grow well under the same conditions as a tropical jungle. So why should we expect innovation forests to be any different? I worry, however, that the best forestry experts will not be around to serve on such a council. Only time will tell.

Thanks again for sharing your thoughts.

Guest Post: Reply by Michael A. Gollin

On this inauguration day of another Illinois President, it is worth reflecting on patentee Abe Lincoln's wise perspective on innovation and the ideal role of patents. In this light, I view your concerns about broken symmetry as a measure of the gap between the ideal and the real, between theory and practice.

You suggest that the cost of prosecuting patents has decreased, but my clients would disagree, noting that over the past couple of years we face a heavier burden to satisfy heightened standards for patentability imposed by the courts and the PTO. Litigation costs remain very high, not so much because of a lack of qualified lawyers, but because of uncertainty about how to interpret patent claims, so that many complex issues of law and fact remain unresolved after extensive discovery. Your third example, Bayh-Dole Act patenting by universities, does not in and of itself raise transaction costs of clearing IP ownership -- rather, I might argue that many of the licensing specialists in technology transfer offices actually streamline licensing because of their expertise and know-how.

Your concept of a "rich ecosystem" of innovation is quite sound. And yes, in Driving Innovation, I describe how IP's oscillation between access and exclusivity may operate as a dynamo or motor for the innovation cycle. (In my book, I occasionally mix the metaphor of a biological ecosystem with that of a machine.) In the innovation cycle, every creative person benefits from access to a wealth of information from which new ideas arise. The creator can then control dissemination of the new ideas via IP rights, exerting control over their use and duplication. This is the mechanism by which companies pool the innovations of employers, and individuals can attract the investment needed to put the idea to work as a product or service or published work. Exclusivity and control lead to investment and dissemination, and thus, heightened access by the public, as the product or service or information becomes widely available. Finally, the fruits of the new idea become widely accessible by society, and can be used to feed the next round of innovation. Access feeds exclusivty, and exclusivity feeds access, like the alternating current in an electric motor. In this view, the key is to get the balance right at each phase of the cycle, and as you say, between big and small players. Because ultimately, society at large benefits when creators and the public have both sufficient access and sufficient exclusivity to make innovation worthwhile.

Coming back from theory to your practical comments, it would certainly be nice to have more flexibility in presenting inventions involving images, whether color "heat maps" of biological data or image processing software. However, a reasonable consistency in the presentation of material is a compromise most of us can accept. Also, you may have hit on one of the Dudas' administration's suceesses, in which the public access PAIR system and electronic filing have finally begun to work well. And (you've got quite a few practical ideas, Michael) it would certainly improve markets in patents if more information about licensing terms was publicly available. But this goes again to the delicate balance between the innovator's right to restrict access and the public's benefit to having access. There are many good grounds for a patentee to keep the economic terms of an agreement confidential, thus blending patent protection for technology inventions with trade secret protections for business information. I didn't find the details of Lemley and Myhrvold's paper -- perhaps this is another theory that does not yet have a viable mechanism for putting it into practice.

Most of the day-to-day projects that arise in my representation of clients involve some aspect of these questions -- how to access a computer program or biological reagent or use a piece of hardware or a song; or how to protect a new medical device or branded product from copyists. Although a brief exchange via blog is inadequate to the task, all of intellectual property -- theory and practice -- can be understood as part of this larger balance between exclusivity and access.

IP as Solution to Market Failure: a Few Responses to Mr. Gollin

What an inspiration to hear that Senator Bayh is still so active in his 80s!  His first-hand knowledge of and experience with the last major round of patent reform is even more important now, and it's great to hear that he's still keeping a hand in the game.

Your first post raises many very interesting points, and I want to try and draw you out a little more on some of them.

First, you are rather too charitable in attributing to me the observation of a need for what you call a shared model of innovation.  But I very much like the vision you have of IP striking a balance between self-interest in exclusivity and self-interest in access.  Indeed such tensions have always existed between innovators and the beneficiaries of their work, and I think we both agree with Lincoln that the IP system has over time proved to be an ingenious way of striking that balance.

I think it's intriguing to consider, however, how much the identities of the parties to these types of negotiations have changed over the past few decades.  You give "two individuals, two companies, or two nations" as examples of the parties to such a negotiation, examples that tend to suggest (and perhaps this was not your intent) relative equality of position -- i.e., relatively symmetrical costs and benefits on each side.  In this sense, important symmetries have been broken within IP law over the past few decades.  These broken symmetries (I can't help using the metaphor, which fits so well here) are largely an unanticpated consequence of many improvements that have been made to the IP system (and I'll stick to patents here, although I see similar trends in copyright):

• Costs of prosecution have generally been stable or decreasing, putting patent rights within grasp of individuals and foreign entities
• Costs of litigation have skyrocketed as the number of litigations and litigation defendants has increased much faster than the supply of lawyers qualified to handle the work
• Bayh-Dole, at the same time that it opened up new sources of private funding for universities, has also raised the transactions costs of clearing IP ownership

As a result, the patent system is no longer adequately described as a competition among large corporations, which occasionally erupts into patent wars, and is settled by cross-licensing treaty.  Rather, an incredibly rich ecosystem is emerging in which individual inventors, R&D labs (public like Rambus, private like Intellectual Ventures, or private like universities), private equity funds (RPX, for example), public investment funds (like Acacia), and the public and private corporations that want access to IP owned by the preceding entities and are net payers under the patent system.  The richness of the system itself is ultimately what merits a more sophisticated theory, such as that presented in your book.

With that lead in, I wonder if you couldn't say a little about your concept of "IP as a motor for the innovation cycle" and how that vision of IP is more useful in the rich ecosystem that has developed?  If the problem is no longer one of simply reallocating rights among large corporations, and smaller entities can't effectively negotiate with large corporations without strong IP rights, then aren't we effectively threatening innovation by limiting damages and rights to injunctions?

I will leave that one big question for you, but I wanted also to address briefly your other comments on the three reform proposals I raised:

The idea of making patent disclosures more user friendly to people other than patent attorneys (and leveraging new technology to do so) is one that occurred to me after seeing that an inventor has started a company called Planet Eureka, the business of which is to provide a website for inventors to post descriptions of their inventions in an attempt to attract licensees.  Planet Eureka runs a workshop, which coaches the inventors on how to pitch their work using multimedia, and then has a catalog of the various inventions up on their website for potential licensees.  I hate to say it, because Planet Eureka does excellent work, but the PTO should ultimately put this kind of website out of business!  The patent system isn't working quite right if inventors are willing to go that route rather than dislcose to the public through the PTO in exchange for exclusive rights.  Ideally, the PTO would collaborate with Planet Eureka to make its services available to all inventors and potential buyers.

Second, Jon Dudas deserves kudos for overseeing the complete overhaul of the PAIR and EFS system.  In this regard, the progress made at the PTO during his tenure substantial and excellent.  In fact, the PAIR system makes determining patent ownership (except, perhaps, for some pesky corporate and bankruptcy law issues) cheap and fast.  In that sense, an ownership clearinghouse of the kind that IDEA appears to have in mind already a reality.  I'm probably missing some nuances of the proposal.

But what I had in mind was the proposal by Mark Lemley and Nathan Myhrvolds that all buyers and sellers of patents should be required to disclose the terms of all licenses and assignments of patents to the government, much as public corporations are required to report their financial statements to the SEC.  Most people flinch at this idea when they hear it because that information absolutely must be kept confidential in the world we live in now.  The question is whether we might all be better off if nobody was allowed to keep it private.  A long time ago I wrote about how such a rule is like the NHL's decision to require players to wear helmets long ago.

I'll get back to antitrust if I see the opportunity later, but suffice it to say that the FTC handling of the Rambus and Schering-Plough cases makes it obvious that some of the folks there don't really understand how IP can promote competition.

Guest Post: Michael A. Gollin

Thank you for your kind invitation. It is a pleasure to read your insightful comments and I hope to see what your readers think.

Let me begin by pointing out that Sen. Bayh is still in office – our offices at Venable – several days a week. Not bad for a man in his 80s. I hope that I am able to do the same because I am sure that in 30 years the practice of IP law will be even more fascinating than it is today.

I agree completely with your first point, that there is a need for a shared model of innovation that goes beyond self-interest. (Speaking of self-interest, I must also agree reflexively with any suggestion that Driving Innovation should be required reading.) In essence, my view is that the role of IP systems is to balance the selfish interest in exclusivity and access. That is, I want to limit your access to my innovation while having full access to yours, but you want to have full access to my innovation, while limiting my access to yours. This gives rise to an inevitable tension, of course. This tension exists whether you and I refer to two individuals, two companies, or two nations. In any given situation involving innovation, whether a negotiation, a lawsuit, lobbying, or international relations, there will be one party favoring more protection, and one favoring less. IP laws determine where the balance should be struck – not for the benefit of those two parties only, but for society at large.

I am not an economist, and Driving Innovation focuses mostly on practical steps you can take to pursue your organizational (or national) goals. However, my attitudes do rest on some fundamental economic assumptions, including those of Adam Smith, and Joseph Schumpeter's work on creative destruction as a model for how innovation moves through and reshapes society. Innovation means that there will always be winners and losers, haves and have-nots. That creates political tensions, too.

Now is a great time to think creatively about patent reform, and reform of copyright and trademark and other IP rights. These laws have changed radically over the centuries, and no doubt will evolve into the distant future as well.

I haven't given much thought to your first suggestion, a revision of patent disclosure rules, but it would make sense to allow more flexibility in how inventions are exemplified in patent applications. After all, we long ago eliminated the requirement for inventors to provide a miniature working model of their inventions. (A few of those intricate old models are exhibited in the Smithsonian American Art Museum, in the former Patent Office, across the street from where I sit.) One constraint in opening up patent rules might be the need to present information in a manner that can be published, translated, and understood internationally. But any reform that can reduce the time and cost required to prepare a patent application would be welcome.

There is broad support for a clearinghouse of ownership information, and IDEA magazine a few years back reported on a symposium of a national (or international) registry that could be used to support securities in IP – like a registry of deeds. That is the easy part. Placing a value on IP rights is much more complex, as it requires an understanding of the scope of the rights, their duration, their geographical extent, their relevance to a particular market, and the size of that market. So the ownership clearinghouse is a much simpler objective.

I am not so troubled by antitrust requirements, in most cases. The ascendancy of the rule of reason as to patents and antitrust laws is generally a good thing, and economists seem to recognize that patents can promote (rather than hinder) competition. Here, too, there is no simple answer. It will never be easy to balance the tension between exclusivity (and short term limits on competition) against increased access over the long term, as more innovations become available. Yes, there are more patents than ever before, and more works restricted by copyright. But there are also many more inventions and creative works more readily available than ever before.

My main proposal is quite simple -- that people should master the basics of intellectual property and its dynamics and put that knowledge to work to promote the interests of their organizations and their nations. Identify your goals, assess your internal resources, learn your competitive environment, and come up with a simple, long-range plan to protect your innovations and to gain access to the innovations you require. Practical solutions exist to many problems that people try instead to solve with policy reform.

At the other extreme, if you want pie in the sky, try this: the US should establish an independent National Innovation Council that would determine, for each type of IP right, whether the laws are too strong (with too much exclusivity), too weak (with too little exclusivity), or just right. An analogy is the Federal Reserve's responsibility in determining whether interest rates are too high or too low. The findings of the NIC could be used to help Congressional staffers find better solutions than those that come out of partisan duels. The NIC could also provide objective information about innovation productivity and the implications of various reforms and how they would impact different industries. This information could also help shape national innovation policy, investments in research, and international trade policy.

I'm glad you the book triggered these productive ideas. But that's all for now.

Introduction for Guest Blogger Michael A. Gollin

As a fun way to kick off 2009 for Broken Symmetry readers, I am welcoming author, patent lawyer, and professor Michael A. Gollin to guest blog on Broken Symmetry. Michael has had a distinguished career, which includes almost ten years of teaching Strategic Management of Intellectual Property at Georgetown.  Recently, he authored Driving Innovation: Intellectual Property Strategies for a Dynamic World, which was released by Cambridge University Press in February 2008.  To give readers a sense of the potential importance of this book to policymakers, the introduction was provided by former Senator Birch Bayh of Bayh-Dole Act fame.  (If only Senator Bayh were still in office!)

Beyond the pleasure of his company, I wanted to invite Michael to guest blog because 2009 marks a pivotal moment in the history of intellectual property.  Patent reform efforts that can only be called misguided were narrowly defeated in 2008.  Many in Congress and in the Obama administration are aware that there are problems with the current patent system, but the proposals for change are all over the map.  If anything, the guiding principle behind most proposals seems to be simple self-interest.  What is needed badly at this moment is a comprehensive economic theory of innovation, and of how the patent system can work to promote innovation.  Mr. Gollin's book should be required reading for anybody involved with patent reform.

The most important reason why Mr. Gollin's book succeeds at explaining how and why the patent system can be an effective means for promoting the progress of science and engineering is dynamics.  Policymakers have understood how economic theory is important to both patent and copyright law for a long time.  But many of the most prominent theorists of law and economics have overlooked how static models of equilibrium (all related in one way or another to the Arrow-Debreu model) fail to accomodate change over time.  Whereas such a failure might have been tolerated in older industries and prior to globalization, it cannot in any industry in which innovation drives growth.  More importantly to present purposes, it cannot adequately explain how and why a patent system can benefit both inventors and society at large.

But rather than summarizing the numerous principles of dynamic economic theory that are explained and applied to intellectual property in his book (read the book!), I want to take this opportunity to engage him in a discussion of patent reform.  What subsantive or procedural changes would be most beneficial (or disadvantageous) to IP and antitrust law?  How does a dynamic theory of IP and competition inform our policy analysis in ways that carry us beyond the standard arguments?

Here are a few areas that I can identify:

• Complete overhaul of patent disclosure requirements: The 19th Century specifications and drawings now filed should be supplanted by full multimedia so that inventors can explain their work in their own words to others in their field using full-color video and graphics.  Let the lawyers worry about claiming.
• Clearinghouse for Ownership and Licensing Information: Any member of the public should be able to determine quickly and easily (for example, through an Internet search) the ownership and market price of a patented technology.  The reason there is not a liquid market for IP rights is because valuations are difficult when price information stays private.
• Complete overhaul of antitrust rules as applied in cases involving IP:  Recent FTC actions suggest a grave misunderstanding of the pro-competitive role of patents.  Patents raise barriers to entry in the markets for patented products and processes, but patents also lower barriers to entry in the markets for R&D.  Because these two competitions take place at different times -- often decades apart -- the net pro-competitive effect of patenting is not grasped by some antitrust decisionmakers.

Michael, am I wrong in thinking that the dynamic theory presented in your book might show favor on these kinds of proposals?  Are there others that you would favor more?

RPX Closes Deal with Acacia

For "light valve" technology.  See press release here.

This must be one of the first deals closed by RPX since its launch late last year.

The deal is not unexpected given what has been publicly disclosed about RPX's business model. It will be interesting to see whether other intermediaries close deals for the same portfolio subsequently.

2009: Year of the OLED?

How about 1 inch thick displays with 2,000,000 to 1 contrast ratio, and less power consumption than LCDs: See the LG OLED at CES 2009.

I've been watching this technology develop for almost ten years. It's going to be a big deal when it rolls out in mass production. A device like the Kindle with an OLED is going to replace the books I carry around with me everywhere.

Happy Holidays

Gas lit, natch.

Happy Thanksgiving

For those of you who have not already seen this, you might enjoy Abraham Lincoln's thanksgiving proclamation, issued in October 1863.  What I did not know until today is that the proclamation was probably drafted by Secretary of State William Seward. One for Alaska.

The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God. In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.

Miscellaneous Sunday Links

* Fourier transforms can be useful for analyzing many time-dependent signals, including that cool "PRAANG" at the beginning of A Hard Day's Night.

* I've been looking for a natural experiment that demonstrates how consumption patterns are poisson-distributed in time for months. Then I found this post by shmula on how diggs are poisson-distributed. The distribution at the top is a cumulative distribution function that represents the summation of clicks over a period of time. Unfortunately, this isn't quite the poisson distribution I had in mind. I expect individual acts of consumption to be poisson-distributed in frequency, which would mean that we should see the poisson distribution over a finite interval reproduced when measured over a different same-length interval. And there's not enough data here to know whether that would be true also. (And I'm guessing it probably wouldn't.)

* The transactions costs of keeping risks uncorrelated = management fees?

* Disabling circadian rhythms in hamsters disrupts memory.

* "At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised." You'd think these guys could have gotten their paper out a little earlier.

* A while back I got after Lawrence Summers for his vacillation on regulation. He says it's just oscillation.

* Lessons from the Japanese attitude toward shareholders. (The pros and cons to owner-oriented management.)

Blood in the streets

Lehman is in Chapter 11 and Merrill is now likely to be owned by B of A. Bear Sterns disappeared months ago. Enron years ago.

Will this crisis be what it takes to get non-accountant involved in accounting policy reform? Will this be the era in which finance and investment professionals get realistic about how growth works?

If so, then this crisis could be merely a hiccup within a long period of continued expansion.

Happy Independence Day!

From the Founding Fathers:

When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

These folks understood better than most of us do today what was at stake in deciding whether to cooperate.

Here's a nice piece of history, which gives a bit of insight into the personalities at work behind the document.  In the first draft by Jefferson, the "self-evident" truths were "sacred and undeniable."  It was Benjamin Franklin that suggested the change to "self-evident."  On my view, that cinches the fact that Franklin was the better student of "Nature."

Bill Gross shows some tough love to the financial industry

Anybody still wondering whether we have an inflation problem in the United States should read this commentary by legendary bond fund manager Bill Gross.

As an aside, I wonder whether more people would be involved with public intellectual debates (as he suggests is desirable) if we heard more from the captains of industry like Mr. Gross.  He's setting a good example in this regard.  As are people like Mark Cuban and Marc Andreessen in the technology community.  Actually, as much as I love to criticize venture capitalists, they also have been setting a good example for others in the financial industry by participating more in public discussion both online and offline.

Stable Market Design with Control Theory

Earlier this week, I had a vision of how analog circuit design theory could have provided some useful insights into how to avoid bubble markets.  I haven't found too much on this from googling, although this paper looks pretty close from the abstract (I don't have a subscription so can't verify whether they're actually thinking the same way).

The field that physicists and applied mathematicians call Control and Dynamical Systems has basically developed to aid engineers in building systems that use feedback to stabilize the state of any system that goes through cycles.  There are lots of things that machines (like the stealth fighter) do that humans would not be able to do because of the magic of feedback-stabilized oscillation.

The implications that this has for business cycles in public and private markets is so obvious that I'm quite certain that somebody already knows how to do this.   Alas, they're probably making boat loads of money on it as we speak.  Another problem worth solving is how to give incentives to such people to share their insights through something other than bidding or asking price.  (Actually, granting patents on financial engineering innovations isn't a bad way to do this.  But a two-decade term would be overkill in most cases.)

In the interest of aiding translation between physicists and economists (and hopefully help avoid yet another major bubble in our financial markets), I'm going to identify the simplifying assumptions that I think are most useful in modeling markets with control theory, and then offer a few extremely crude observations about the potential benefits of applying this theory.  I'll use electrical engineering terminology to show the relationship between the variables.

* Price can be modeled as a two-dimensional current signal in time and demand P = P(t, d)
* Price changes will be amplified by bundling supply and demand (e.g., through securitisation) so that P = A*P where A is either less than 1 (supply bundling) or greater than 1 (demand bundling) depending on whether buyers or sellers are being aggregated by a particular security.
* Transactions cost can be modeled as resistance (and Price * Transactions Cost will approximate Demand)
* External money supply can be modeled as capacitance (which will introduce a phase lag into price)
* Liquidity can be modeled as inductance (which also introduces a phase lag into the price)
* Demand can be modeled as voltage

For purposes of this model, I'm assuming that the external money supply obeys some predictable rules (like Taylor's Rules).  The system is going to be extremely indeterminate if the external money supply doesn't behave in predictable ways.  (There's a useful result right there!  Let's implement Taylor's Rules.)

From my very crude understanding of theory, this kind of model would permit the following predictions to be worked out from the nonlinear differential equations that govern such a system:

* Systems that include both inductance and capacitance (i.e., external money supplies and liquidity) are going to oscillate at a characteristic frequency.  That frequency is the "resonance peak," and it's amplitude will vary depending on the amplifiers.  If they're too strong, the circuit blows up.

* Systems that include large inductance but low capacitance (i.e., liquidity but no external money supply) are going to decay exponentially to zero price

* Systems that include mostly positive feedback (i.e., amplify demand without inverting or phase shifting the input signal) are going to increase exponentially (until they blow up).  (This was Monday's insight.)

* Systems that are tuned to include just the right amount of positive and negative feedback are going to oscillate stably within a limit cycle for long-periods of time.  In fact, such systems will "magically" self-correct price to demand.   Actually, this is most markets, most of the time.  We just haven't been paying enough attention to the bigger picture.

Somebody out there must have done some graduate school research on this topic.  We should send them to Bernanke and hope for the best.

UPDATE: Thanks Google.  Here's Steve Fairfax of MTechnology making a similar point.  And here's Donald D. Hester and D.L. Brito making a similar point... in 1974!  Do we ever learn?  (Don't answer that.)

UPDATE2: Here's a book on "Economic Dynamics" with a whole section working out a version of control theory applied to a more complicated model.

UPDATE3: I've worked out a numerical example with estimates for the subprime mortgage market here.