Broken Symmetry

What is Wrong With Technology Transfer Office Culture?

Jon Sandelin from Stanford University's Office of Technology Licensing published an article in the Summer 2009 issue of an AUTM journal called University-Industry Relationships: Potential Risks. Perhaps unsurprisingly, the article is gated and available only to members. Already in the title you can see where Sandelin comes out on the idea of having more commercial ties with universities. One of the messages repeated on this blog over the past year has been that feedback loops promote innovation. The feedback loops between universities and industry are perhaps the most difficult to forge and maintain of any in our innovation pipeline. We should be promoting these feedback loops aggressively. Unfortunately, the tentative, preening, and antiseptic tone of this article is all too characteristic of tech transfer culture inside top-tier research universities.

Sandelin does a good job listing some of the benefits of tech transfer. But consider the "summary of risks" he comes up with:

1. That patenting and licensing by universities may inhibit rather than promote the progress of science and production of innovation
2. Of a loss of public trust in the university and/or its employees
3. Of unfulfilled commitments to research sponsors, students, or the university
4. Of bias when reporting research results or not reporting research findings that would be adverse to the interests of an industry patron
5. Of exploiting the work of students to benefit personal interests of their supervising professor
6. Of adverse and embarrassing reports in the media, whether actual or perceived, that affect the reputation of the university
7. That new discoveries made by university employees are not reported to the university or to a federal funding agency as invention disclosures, but are instead diverted to a company in which the employee has a financial interest

That's it. Wait. That's it?! Of these, only 4 is what I would consider an actual risk to the university. Look at the other six items on this list more carefully. What is really there?

First off, what on earth can he mean by one? If one is true, then why are we even bothering? The tech transfer experiment has been a wild success. As economist Kenneth Arrow noted recently, some of the best work results when academics are asked to work on a problem they've never thought about before. Tech transfer relationships work because universities get data from industry that is as valuable to academics as the theory that industry gets from universities.

Two just shows how little conviction Mr. Sandelin has in the fact that he is doing something important and beneficial for the university and its employees. Why would these people not trust the university if it is doing things that benefit society at large by cooperating and collaborating with private companies? Does he believe making money is inherently evil? If so, why not come right out and say that instead?

Three strikes me as very strange. Isn't the possibility of unfulfilled commitments to research sponsors a risk for the research sponsors? How is that a risk for the university? Similarly, why would students see more industry relationships as a risk? Students need jobs after they graduate, and somebody has to provide work.

Five would be hilarious if it weren't sad because it demonstrates how big a problem negotiating ownership rights is when it isn't done properly upfront. Universities love to ask graduate students to sign a thick contract when they start that gives away all of their rights. Most grad students, of course, never read the fine print and only find out how badly they've been taken advantage of later when somebody makes millions on their blood, sweat, and tears.

Six also makes me wonder. That's not a risk of relationships with industry. That's a risk of dysfunctional relationships with industry. Why would that be a problem for a university like Stanford, I wonder?

So of these seven risks, it is only four, the risk of bias caused by taking money from a particular group, that strikes me as very serious. But that risk is a risk for any institution, public or private, for-profit or not-for-profit. There's nothing really more difficult or challenging about solving that problem at a university. In fact, it's probably easier to solve that problem at universities, where most academics prize their professional reputations far above any particular grant money. Let the researchers themselves be the ones to decide whether it's worth risking their reputation on taking funding from some large corporation. Then just make sure that everybody can lookup and find out from whom researchers are getting their support. That's how we do things in this country.

It's very frustrating to see how backwards the thinking is at what is considered one of the best technology transfer offices in the world.

Excellent Sentences from Joff Wild at IAM

However, how do you measure value when IP can be so frustratingly intangible - what price that collaborative relationship with a competitor that a piece of IP may enable, for example? One at least partial solution to this conundrum may be to make royalty rates far more transparent. One suggestion was that all licensing deals agreed in the US should be publicly recorded at the USPTO so that people could see the sums involved. This would have to be compulsory as no-one would do it voluntarily.

From the IAM Blog.

Highlights from the 2009 IP Business Congress

Monday and Tuesday of this week I attended the second annual IP Business Congress, which this year was venued at the Four Seasons Hotel in Chicago. There were almost 400 attendees at the event, which was a good turnout given the economic climate. Attendees represented stakeholders in nearly every part of the IP Market, both primary and secondary. As expected, the panels organized by IAM magazine were excellent and informative, especially the question and answer sessions afterward. This is an event that I expect to put on my calendar annually.

Highlights for me as an attendee to this event included (1) the first panel on Monday on the state of IP rights in China, India, Japan, Europe, and the United States; (2) the panel on patent pools on Monday afternoon; (3) the panel on open innovation on Monday afternoon; and (4) the Gala dinner on Monday night. Tuesday's panels were also excellent, but of less interest to me because of my more direct involvement with many of the issues addressed on Tuesday.

State of IP Rights Internationally

Harvey (expert on China) kicked things off by noting how IP rights had been a strong influence on the development of rule of law more generally in China: IP was the first private property right to be recognized by the Chinese government after the cultural revolution. Harvey also explained that in number of lawsuits, there is more IP litigation in China than in any other nation. The picture he painted was of a thriving IP system in China that was operating decoupled from the rest of the IP world. The coupling of China's IP system into the rest of the world's will produce winners and losers of epic proportion, and now is the time for us to think strategically about how to prepare our clients and customers for this inevitable merge of the Chinese system into the rest of the world.

McGinley (EPO Officer) followed Harvey with sobering statistics on the patent application bubble that is growing inside the US, EPO, and Japanese patent offices: 2 million applications althogether are now pending inside these offices. Given how the rate of examination has not kept up with the rate of growth in filing, McGinley suggested that the system was beginning to resemble a pyramid scheme! This was a brave position for a government official to take, but everybody in the system should appreciate what McGinley is trying to do. Where might we have been had more financial regulatory authorities here in the U.S. pointed out the pyramid-scheme-like growth of the subprime mortgage market? McGinley was short on answers as to how to solve the problem, but he did suggest that Chinese officials were probably at the top in terms of training practices and the reduction of systematic errors in examination. This seemed unsurprising to this listener given the on-the-ground experience of many Chinese with more complex manufacturing workflows!

The presenter from Japan had little of interest to say, and presented some confusing interpretations of statistics on patenting in Japan. For example, he pointed out that the largest number of patents issued in Japan were to computer companies rather than pharma companies. Pharma companies need only one well-drafted and prosecuted patent to protect their products. This is not very surprising, and is true everywhere in the world.

Basheer from India gave in many ways the most interesting presentation. His was mostly a diplomatic presentation of facts about the IP market in India, where the political agenda is driven by the success of generic drug manufacturers. As a few BS readers may know, Basheer is also one of the authors of the consistently excellent (but very detailed!) Spicy IP blog. From listening to Basheer, one could piece together a picture of India in a critical state, in which more or less IP protection could result from a sharp push in either direction. Too difficult to call for the time being. On my view, it seems that Indian biotech and pharma researchers have a regulatory arbitrage over their U.S. counterparts, who have many years of redtape to cut through before carrying out even relatively safe clinical trials! Note that beating heart transplants are now being carried out in Indian hospitals. There are many high-risk, high-reward medical treatments now avaiable in India that may never be available in the United States. Another trend to watch carefully.

The first question/comment for this panel was also notable. It came from Sherry Knowles of GSK, who noted that Chinese generic manufacturers were getting drugs to market before US manufacturers by simply scraping clinical data off the clinicaltrials.gov website on which U.S. manufacturers, such as GSK, have to post their data by law! There's one for the USTR to call to Chinese government attention.

Patent Pooling

The Monday afternoon panel on patent pools included Sisvel founder Dini, Hinman from Verizon, and Michel from the FTC. Dini gave a great pitch for hiring independent administrators (such as Sisvel) for allocating profits among patent pool participants, and for getting such admins involved at as early a stage as possible. Michel gave a presentation of the recent history of FTC regulation of patent pools, including a summary of the federal court holdings relating to Rambus's participation in JEDEC. Hinman talked about the perils of patent pool participation, and noted that even opt-out could be anti-competitive. Referring to one patent pool in particular, he pointed out that all but two industry participants had entered. I saw Michel scribbling notes!

The upshot is that if your company is involved with patent pools, you need to hire experienced outside counsel with knowledge at the interface of IP and Antitrust law to help ensure your business strategy reduces the risk of antitrust liability. Your author knows and works with a few such experts, and is happy to make an intro. Note that most corporate lawyers or IP lawyers will not be aware of the perils of competition law because the Bush and Clinton administrations were relatively lax on this front. All indications are that the Obama administration will be more active in enforcing competition law.

Open Innovation

By now the term "open innovation" has become relatively well-known within the business community. Some IP owners may believe that open innovation represents a form of socialism -- an alternative to a system of property rights. Attendance to this panel would have been the antidote to such misunderstandings of this theory. Panelists Weedman from P&G, Simonton from Exelixis, and Bergelt from the Open Innovation Network (and formerly of Paradox) talked about the dynamic growth that the feedback loops established by open innovation networks facilitate for the companies that take open innovation seriously.

Because the theory of open innovation is a paradigm shift from traditional neoclassical economic theories, only a handful of businesses (including P&G and Exelixis) have been fortunate enough to find leaders willing to foster the organizational commitments necessary to make open innovation work. This business model is the future of every large public corporation in the world. Watching these businesses continue to outgrow their competitors, others will eventually follow.

Gala Dinner

One of the best parts of the event was meeting the attendees. Over drinks before the Gala dinner, I had the chance to catch up with Niels Reimers, who later that evening was inducted into the IP Hall of Fame for his path-breaking work in technology transfer. In this rare moment of opportunity, I had the chance to ask Niels about how he worked at Stanford. By Niels's description, he was practicing the same technique followed by the best founders and managers in Silicon Valley both then and now -- "management by walking around." Dave Packard and Bill Hewlett, Bill Perry at ESL, and Nils at Stanford were all doing management by walking around. Niels's personal accounts of his work connecting Stanford music department (!) professor John Chowning with Hamamatsu corporation engineers were a highlight among highlights for this event.

Later, when Niels cited the Teece Model of innovation in his acceptance speech, I nearly fell out of my chair. The same model was cited by FTC Commissioner Tom Rosch in his speech about new theories in competition law on June 1, 2009. Note that Teece was also cited in the explanation of systems theory provided in your author's letter comment to the FTC on the Evolving IP Marketplace.

Final Thoughts

Another highlight made possible by my attendance to the event, but not directly related thereto, was an invitation to a breakfast with Congressman Bill Foster on Tuesday morning. I am already a fan. Foster is an entrepreneur and physicist who decided (after 22 years of building superconducting magnets to detect subatomic particles) to roll up his sleeves and try to help fix government. I'm pretty sure there's nobody else in Congress who would know what the title of this blog refers to. The discussion of the patent system and innovation at this breakfast was the best I've heard ever anywhere, but it also revealed to me the underlying problem facing patent reform: nobody has a complete view of the whole system. Almost everybody (at least) focuses on the broken incentives and procedures facing them in their subsystem, without stepping back to see how all of the subsystems coalesce into an competitive and innovative ecosystem. Nonetheless, the kinds of questions asked and answers given at this breakfast suggest that already the level of discourse has progressed far beyond the pat answers that were served up last year when patent reform was before Congress. There is more widespread awareness at least of how the public has been manipulated to some extent by the more technologically sophisticated and media-connected subset of stakeholders in the system. Perhaps we will have sensible patent reform after all. Here's to that hope.

2009 IP Business Congress and some Shameless Self-Promotion

Broken Symmetry readers may or may not realize that your author's day job involves patent procurement and enforcement. Your author was recently honored to have been named one of the World's Leading IP Strategists by Intellectual Asset Management magazine -- a peer nominated process mediated by IAM.

From June 21 through 23, I will be in Chicago for the 2009 IP Business Congress. IAM sets a standard of excellence for the industry, and this event promises to be no exception, with a list of industry luminaries speaking. If you've got the time, it'll be worth dropping in.

And if you are planning on attending, are a reader of Broken Symmetry, and are interested in meeting up, just click on the link on the left and email me. I always enjoy meeting readers.

Spring 2009 Ocean Tomo Auction: The Secondary Market Evolves

Although many of the attendees to the auction may have come away with the sense that the auction market is closed until the recession ends, a look at the numbers says otherwise. In particular, the total volume of sales at the auction was around $3 million -- considerably less than the immediately preceding auctions, but on par with the the first auctions held by Ocean Tomo about four years ago. For the auction market at least, it has been a lost half-decade rather than a lost decade as it has been for the equity markets.

I have some first-hand experience here. This was my second auction. The first I attended was in Chicago in October 2007. The impression I had there was the same that many who first attended yesterday probably came away with -- i.e., that this is a very thin market, with few bidders, and very specialized property for sale. For an investor, thin markets are a good thing, presenting the opportunity for arbitrage given the right connections and funding. From that perspective at least, things are looking better now than they did a few years ago. It was clear, for example, that some bidders who had been involved in 2007 were no longer around for this auction. There is no reason to believe, however, that there is less valuable IP available for sale.

On the other hand, it was obvious to me as somebody representing a seller that most sellers were ill-advised at this auction. Thanks to some careful pre-auction work, we (at Drinker Biddle & Reath) were able to close the sale for our client's lot. (Sorry, but due to client confidentiality rules I cannot say more.) Unfortunately, this was not the result for many of the sellers at the auction yesterday. In some of these cases, I could pick out from the description in the catalog some obvious problems that might have prevented bids from coming in. In others, it was clear to me as somebody who has worked at a VC fund that there was no market whatsoever (at least for now) for the technology claimed by the portfolio. In all of these cases, the sellers probably could have been better advised on how to value their IP and present it for sale at the auction.

Noteworthy also was the level of excellence demonstrated by Ocean Tomo in putting together these events. At both of the auctions I have attended, Ocean Tomo has assembled a first-class group of panelists to provide information and training for the inventors, business people, lawyers, and investors who attend. I might add too that they know how to pick their venues. No rubber chicken for lunch at these events. Ocean Tomo and its sponsors are providing a valuable public service to the market at the same time they are doing good business at these events.

Despite these successes, it is becoming clear by now that because of the transactions costs associated with the valuation and exchange of IP, auctions are usually the best option only for smaller, more isolated portfolios. Once the strategic value of a portfolio exceeds a certain threshold, IP owners will find it more worthwhile to hire lawyers or private brokers to package and market a portfolio to potential buyers.

Some people might think this spells doom for Ocean Tomo. Those people are sorely mistaken for the simple reason that the packaging and marketing of IP requires highly specialized training, along with access to a specialized network of professional buyers and sellers. Regardless of whether Ocean Tomo continues its auctions with the same frequency with which they have been held over the past few years, there is no doubt that it has accumulated an amazing group of professionals and perhaps the best social network of accountants, lawyers, brokers, buyers, and sellers that is available to non-repeat players in this market. This is only a guess, but an educated one: the IP market is evolving and Ocean Tomo is about to evolve with it.

IP Valuation

I'm very disappointed to have missed out on the discussion in the comments to this post at the IAM blog, but glad at least to have found the comments now through a comment over at the interesting new IP Prospective blog. Some of the following remarks were made also by commenters there (go read the whole blog post and comments). IP valuations are often done very differently depending on whether the IP is considered a proprietary asset or whether it is intended to be licensed out or sold. As a rough cut, I'd say that in the former case, IP is viewed as equity and in the latter, as an asset.

So long as we're talking about the same thing the two valuations should end up agreeing. The fact that they don't often agree goes more to how we're not talking about the same thing than it does to differences in methods of valuation. In both cases, valuations should ultimately rely upon some discounted cash flow analysis.

What are we talking about when we talk about IP? There is no single right answer because there is no single purpose for IP. Yet the right answers narrow down considerably if one focuses on definitions that incorporate characteristics of every category of IP recognized by law (trade secrets, copyright, trademark, and patents). Here's one cut at such a definition: IP is any good or service protected by exclusive rights that gives a company a competitive advantage. If the company would not have the competitive advantage without the exclusive rights, then valuations should focus on the legal strength of the IP in valuing it. If the company would have its competitive advantage from the IP regardless of whether the legal rights were enforceable, then valuations should focus on the economic advantages in terms of reduced costs or increased price inelasticity without paying too much attention to the legal issues.

One thing that's worth nothing, however, is that if the market for IP rights were more transactional rather than litigation-driven, these two approaches to valuation would collapse into one. Transactional norms -- because transactions are voluntary -- tend to mimic the needs of the parties to a transaction.

Lemley and Myhrvold have an interesting suggestion for promoting transactional norms, which is echoed by a number of earlier commenters: make full disclosure of the terms of licensing or assignment of patent rights part of the quid pro quo for patenting. Comparables aren't great in real estate either, but the real estate market clears with enough bad comparable information available to both parties.

ADDENDUM: I may be shortchanging the importance of valuation methodology a little here. Last year I did a whole post on how valuation methodologies could be improved. See here. That post was making a big stretch, however, since frequency-averaged measurements of costs or price inelasticity are not part of accountants' or even economists' toolkit right now. There are glimmers of hope that they may come to be adopted. See this post and the linked article on how relationships between firms is discernible from the synchronization of market prices.

At the core of any competitive advantage is some capability (Teece) or routine (Nelson and Winter) of a firm to cooperatively produce for a market. Looking at time-correlations (i.e., equivalently, frequency synchronization) is a good way to see how an innovation improves competitive advantage. If I were an academic, I'd be writing a book on this now.

Reigniting the Engine of Growth with the Sparkplug of Invention

Why do patents end up in litigation?  Typically, people answer that it is the amount of money at stake.  This answer is not wrong.  Since the cost of litigation is relatively constant, people should be (and in fact are) more willing to pay lawyers to litigate claims that are very large compared to the cost of litigation.  But this is not a full answer to the question.  For this answer does not explain why patents specifically should end up in litigation more often.  In fact, trillions of dollars in legal rights are exchanged everyday around the globe without litigation.  By comparison, the amount of money at stake in patent lawsuits is relatively small.

The Theory of Focal Points

Economist Thomas Schelling is famous for advancing a theory of conflict and cooperation. According to Schelling, even when communication (and hence negotiated agreement) are difficult or impossible, two people can cooperate through a shared focal point. For example, if I told you to meet me in New York City tomorrow but for some reason I couldn't tell you where and when, we might still meet by going to a famous spot at noon, such as Grand Central Station or the top of the Empire State Building.  Our shared vision of these famous spots is a focal point that permits us to coordinate.

The theory of focal points explains why some groups of people fight and some cooperate.  When the focal point for a first group is mutually exclusive to the focal point for a second group, conflict emerges.  When the focal point is shared or non-mutually exclusive, cooperation emerges.  To some extent, all conflict between people can be viewed as a costly renegotiation of focal points.

With Schelling's theory in mind, let's revisit the question of patents.  What are the focal points for the various parties involved in patent litigation?  To simplify the question, suppose there are only two groups involved in patent litigation: "inventors" (or their employers) and "producers" (i.e., the people who sell products or services that practice a claimed invention).  Ignore for now the detail that some inventors are also producers, and that some producers are also inventors.

When patents are litigated, the focal point for inventors is on obtaining a large royalty or payment for the right to practice the invention.  By contrast, the focal point for producers is on paying a small (or no) royalty or payment to practice the invention.  Although both inventors and producers seek profit, at the point in time when patents are litigated, these focal points are mutually exclusive because (at worst) both have incurred costs of R&D for developing the invention.  Patent litigation thus becomes a zero sum game.

The Focal Point of Profit

At first glance, therefore, one might think that inventors and producers are doomed to conflict.  Before rushing to that conclusion, however, it's worth noting that in some broader sense, at least, inventors and producers share a focal point -- namely, profit.

Profit is an unusually broad focal point.  As Adam Smith is famous for pointing out, the voluntary exchange of goods and services creates profit.  With profit the focal point, the problem of avoiding conflict between inventors transforms into a problem of identifying and promoting the circumstances in which the voluntary exchange of inventions for cash can take place between inventors and producers.

If such voluntary exchanges never occurred, we might have reason to doubt whether conflict between inventors and producers could ever be avoided.  Fortunately, such exchanges do, in fact, occur.  Thus, it can be inferred that the conflict arises over how what is exchanged (services and patent rights) should be valued.

Again, this might seem puzzling at first because, at least in principle, there should be no difference in how value is measured.  At least within the United States, the same rules for accounting and reporting financial statements apply to both inventors and producers.  In principle, the inventors and producers should be able to compare their financial statements, and reach some agreement over the value of an invention.

But since this never seems to occur, the most reasonable inference seems to be that the conflict arises from a difference in how we interpret accounting and financial statements.  In fact, it is precisely here that the focal points of inventors and producers diverge.  Having had the rare opportunity of working both in patent law and accounting, it has been my privilege to be one of the first to have noticed this.  In short, a better theory of accounting would help resolve conflicts over patented inventions and restore a cultural norm of cooperation within patent law.  Astute readers should note that, in addition to patent law, Venice was the birthplace of double-entry accounting in the 15th century.

Problems with the Static Picture of Cost Accounting

As described by William H. Waddell and Norman Bodek in Rebirth of American Industry, the theory behind the most dominant method of accounting (which is called "cost accounting") was developed at General Motors in the early 20th century by Alfred Sloan, Pierre DuPont, and Donaldson Brown.  The relevant detail about this theory is that it was designed to measure (and hence manage) return on investment (ROI).  To that end, the paradigm that Sloan, DuPont, and Brown had in mind in developing their rules for accounting was a static picture.  Specifically, their picture was of what the corporation would be worth in liquidation.

With the picture of the corporation in liquidation in mind, it is easier to understand why so many things that we might intuitively imagine to be costs are instead treated as assets under cost accounting.  For example, under the cost accounting system, unsold inventory is reported as an asset.  Cost accounting assumes that the inventory could be sold at cost in liquidation.  The reporting ignores, of course, the fact that unsold inventory will incur expenses.  More importantly, it ignores that what's unsold before liquidation is less likely to sell at cost in liquidation.

Under the cost accounting system, IP is called an asset on balance sheets.  Again, the assumption is that patents can be sold at cost during liquidation.  Again, this assumption begs several important questions.  Perhaps most importantly is the question of why, if the IP is so valuable, it could not be used to attract financing or revenue, thereby avoiding liquidation.  There were (and are) reasonable answers to that question when debt or equity are unavailable for reasons that have nothing to do with the demand for the patented invention.  But its salience suggests that there might be better ways to measure the value of IP.

Whereas all patents cost something to procure, market demand only emerges for a handful of all patented inventions.  Thus, the system of cost accounting has given managers and investors the perverse incentive to aggregate thousands of patents, inflating their balance sheets, much like we saw prior to the subprime mortgage debacle.  Firms invest billions of dollars in new technology, spend millions on patent portfolios, inflating their asset accounts -- all before attracting a single customer!  Not to be outdone, when the corporation fails, the cost accounting system encourages us to sell the patents at auction, and let third-parties extract whatever they can from the legal rights.  On my view, the system of cost accounting, coupled with the shortage of patent litigators who really understand technology, are responsible for the emergence of the worst kind of patent trolls.

Dynamic Accounting and the Promise of Cooperation

Fortunately, there is now a light at the end of the tunnel.  In fact, many corporations have shifted away from the static picture of corporations inherent in cost accounting to a more dynamic picture.  Lean accounting, in fact, was practiced at Ford Motor Company almost 100 years ago, before Ford was eclipsed by the success of General Motors.  It turns out that cost accounting is a perfectly fine system of accounting when demand is basically infinite relative to the cost of supply.  If the market is never cleared, then the corporations that use cost accounting will end up reporting higher return on investment (ROI) than the corporations that use lean accounting.  Lean accounting is an inherently more stable mechanism for promoting growth within a corporation in part because it does not tradeoff short-term gains in income against long-term sustainable growth.  But once GM started doing it, everybody else in the automobile industry, and eventually the entire economy, had to follow.

Under a dynamic theory of accounting, IP is more like equity than it is like an asset.  That's because the primary value of patent rights is in promoting invention and collaboration, both of which are dynamic because people are dynamic.  Elsewhere I have explained how inventors are customers.  Within the cycle of growth of corporations, inventors and customers are the source of information about demand.  It is no accident that unmet need was considered by Judge Learned Hand to be the most important of the secondary considerations on obviousness.

By contrast, assets are static.  By adopting rules for reporting and managing the IP that are more consistent with the actual mechanism whereby it increases profit, we will in turn discourage wasteful conflicts.  A very important corollary to this is that stronger patent rights would be beneficial in promoting collaboration and avoiding conflict.  Strong property rights discourage people from litigating what could be solved through negotiation at an earlier point in time. As Robert Frost noted, "Good fences make good neighbors."  With a change to the accounting rules, these early negotiations will happen more often.

Finally, let me emphasize that changes to financial statements need not be dramatic.  For example, the simple addition of average daily debit and credit flows for each balance sheet account would permit the shift in managing and investing that I'm advocating here. Since most accounting is now done by computers, this kind of change is actually very cheap.  The value of inventions could then be measured easily by comparison between the average daily debit and credit flows before and after an invention had been implemented.  Suddenly, inventors and producers have a numerical way to measure the value of an invention.

IP is not an Asset: Patents and Inventors Need to Stick Close

Earlier this week, Peter J. Wallison argued that conventions in fair value accounting may in part be the cause for the recent bubble markets.  Specifically, Wallison pointed to the convention (implemented under FASB 157) that requires assets to be carried at "market" values, even when those assets are not being held for trading purposes.

Almost any scientist or engineer would immediately have recognized the truth of this argument.  Our understanding of any system -- chemical, electrical, mechanical, or financial -- will be limited in part by the accuracy of our tools of measurement.  When one considers how FASB 157 required banks to report the values of MBSs, CDOs, and CDO^2s on their balance sheets far above what the banks would themselves have been willing to give away for the same assets, one understands how the financial markets quickly lost track of the intrinsic value backing the securities traded.

This wisdom has direct relevance to the secondary markets for IP.  Most of the firms now in the secondary markets for IP have taken the view -- and are conducting their businesses -- as if IP were an asset.  This is because IP does bear some characteristics of an asset.  Namely, like real and personal property, IP can be protected through exclusive rights.  The analogy to property has thus come to dominate our understanding of the nature of IP.

Although accountants often treat IP as an asset, IP is not a commodity.  IP is more like equity, although it is not like other equity.  IP is a limited exclusive right to human capital (namely, to inventors' time solving a technological problem).

Maybe part of the reason that Abraham Lincoln understood the importance of patent law is because he understood that human capital cannot be owned.  The photograph shows the Emancipation Proclamation, whereby Lincoln did more for the cause of freeing human capital than many other men together have done in the course of human history.  Lincoln loved the patent system because he understood that it too could lead to more freedom.  Scientists and engineers work best free from the immediate demands of business people and customers.  The idea of a patent system carries within itself the promise of more innovation and more freedom.

POSTSCRIPT: Please note that I do not believe that inventors are literally enslaved right now.  There are obviously huge differences between the enslavement of millions of black Americans and the metaphorical enslavement of inventors who are now forced to do work other than inventing because of the broken patent system.  I do, however, believe that making people more free leads always to a multiplicity of unanticipated social benefits.