Intellectual Property

I. Definition, Foundation, and Types of Intellectual Property (PI)

• Definition and Purpose: Intellectual Property (PI) is the set of rights protecting the creations of the human mind.

  • The goal of PI is to recognize and reward creativity and innovation by granting authors or inventors temporary control over their works.

• Foundational Philosophies: PI is typically based on two main approaches:

  • Natural Right (Derecho Natural): The belief that the creator holds a moral right over their work.

  • Utilitarianism: The belief that protection is necessary to incentivize innovation and progress.

    • This incentive allows companies to recover massive investments, such as the initial high fixed costs (e.g., $1 billion) required for pharmaceutical Research and Development (R&D).

• Types of PI Protection:

  • Patents (Patentes): Protect new technical inventions and procedures.

    • The word patente means "open" in Latin, reflecting the idea that the invention is made public.

  • Copyright (Derechos de Autor): Protects literary, artistic, and scientific works.

  • Trademarks (Marcas): Identify and distinguish products or services.

    • The sources generally support trademarks to prevent fraud and consumer deception, unlike patents or copyright.

  • Industrial Secret (Secreto Industrial): An alternative to patenting where one simply keeps the production process secret (e.g., Coca-Cola's recipe quantities).

II. Core Critiques of Intellectual Property

• Iusnaturalist (Natural Rights) Critiques:

  • Non-Rival Goods: Ideas are considered non-rival goods; they are not scarce.

    • If one person has an idea and shares it, both people possess the idea, meaning there is no conflict over their use, and thus property rights are inappropriate.

  • Violation of Private Property: PI laws violate the natural rights of individuals by coercively restricting how they can use their own physical property (e.g., paper, time, computer) to replicate or use an idea.

• Utilitarian Critiques (Efficiency Arguments):

  • Artificial Monopolies: PI creates artificial monopolies that slow down innovation.

    • The first modern patent law in 17th-century England was called the "Law of Monopolyo".

  • Incentive Distortion: Patents incentivize companies to make only marginal innovations (small, minimum changes) to patent a new idea, rather than pursuing genuine, large-scale changes.

    • In pharmaceuticals, this results in the widespread practice of "me-too patents".

III. Empirical Evidence and the "Patent Puzzle"

• Lack of Correlation with Productivity: There is no empirical evidence that patents, despite an enormous increase in their number and legal strength, have led to a corresponding increase in innovation or productivity growth.

  • This is known as the "patent puzzle".

  • For instance, in the US, the rate of patenting quadrupled over 30 years, while aggregate productivity growth slightly declined.

• Competition and First-Mover Advantage: Innovation is primarily driven by competition and the first-mover advantage.

  • The First-Mover Advantage (ventaja de ser primero) grants significant benefits, recognition, and time-to-market profits, often lasting years, reducing the necessity of patent protection (e.g., the iPhone sold millions before serious competitors arrived).

• Industry Lifecycle: Innovation thrives in the early, competitive stage of a new industry (e.g., early autos, software) without relying heavily on patents.

  • Patents become highly valued and overused only when an industry matures and growth potential diminishes, serving as a tool for established, stagnant firms to block new competitors.

IV. Patent Inefficiencies and Market Behavior

• Tragedy of the Anticommons: This phenomenon occurs when fragmented ownership (too many patents) makes it impossible or prohibitively expensive to innovate.

  • Producing a modern product (e.g., a phone) requires components that may each be patented, subjecting future inventions to a gigantic hold-up problem where each patent holder charges higher-than-efficient licensing fees.

• Patent Trolls and Defensive Patenting: Patents are often used as weapons in an "arms race" rather than for useful innovation.

  • Patent Trolls are entities that purchase patents, use them minimally, and wait for competitors to infringe, generating profits solely by suing innovators.

  • Large companies engage in defensive patenting (e.g., Google buying Motorola Mobility) to protect themselves from litigation by competitors, creating huge barriers to entry for newcomers.

• Ineffective Disclosure: A core theoretical benefit of patents—that they disclose working methods to the public—is largely non-existent in practice.

  • Modern patent applications are often intentionally complex (hyper-specialized legal language or legalese) and provide negligible practical information, making them indecipherable to anyone but a patent attorney.

  • Companies frequently advise engineers not to study existing patents to avoid the possibility of having to pay triple damages for willful infringement in a lawsuit.

V. Political Economy and Regulatory Capture

• Lobbying and Rent-Seeking: The patent system is shaped by political economy pressures and is highly susceptible to regulatory capture by wealthy incumbents, who lobby for stronger protection to preserve and expand their monopolies.

  • Interest groups, such as the pharmaceutical lobby, push for longer protection periods (e.g., continuously extending copyright terms for works like Mickey Mouse).

  • Patent lawyers have a massive financial incentive (billions in legal fees) to promote the issuance of more patents.

• Biased System: The US Patent Office operates under pressure to be more generous in issuing patents, defining a higher allowance rate (acceptance rate) as "the right path".

  • Courts specializing in patent appeals have sometimes expanded the scope of patent rights, even granting patents for obvious ideas (e.g., Amazon's one-click purchase patent).

• Asymmetry in Litigation: When a plaintiff wins a patent lawsuit, they appropriate the full benefit of their monopoly; when a defendant wins, they only receive a slice of the overall benefit (which also accrues to competitors and consumers), resulting in a fundamental asymmetry that favors the continuation of patent litigation.

VI. The Pharmaceutical Case and Proposed Alternatives

• Pharmaceutical Sector Issues: While the pharmaceutical industry claims patents are essential due to high R&D costs, some evidence suggests that countries that adopted patent laws later were initially more innovative.

  • Non-Patent Barriers: Beyond patents, companies must also satisfy high investment costs associated with meeting market regulations, such as sanitary papers and FDA requirements, which limit copying ability.

  • R&D Cost Breakdown: About 80% of the initial fixed cost of drug development comes from Stage III clinical trials, which current law mandates be privately produced.

• Alternatives to Patents:

  • Prizes (System of Prizes): Government intervention could shift from granting monopolies to awarding prizes to compensate for high fixed costs.

  • Public Goods Clinical Trials: Treat Stage II and III clinical trials as public goods, financed by government agencies, thereby lowering the barrier for drug development.

  • Licensing and Open Models: Systems like Creative Commons or open software (FLOSS) allow free use of creations while protecting the creator's authorship, fostering collaboration and thriving without monopolies.

VII. Policy Recommendations

• Abolition vs. Reform: Many scholars conclude that, given the deeply rooted political economy issues, the patent system is broken, and abolition is the proper goal, rather than incremental reform.

  • Fritz Machlup famously stated that if we did not have a patent system, we would not institute one, but since we do, it would be irresponsible to abolish it. Six decades later, some economists argue it is time to reassess this conclusion.

• Incremental Reforms: If immediate abolition is too drastic, policy should aim to gradually decrease patent monopolies. Suggested reforms include:

  • Gradually shortening patent durations.

  • Stopping the extension of what can be patented.

  • Requiring that patents only be granted for truly nonobvious insights (which the US Patent Office frequently fails to enforce).

  • Strengthening antitrust and competition policies to limit patent use in high-tech sectors.

  • Not granting patents on research results that received federal subsidies.