Why patents are still needed: A response to the title story “Set innovation free!” published by the Economist on 8 August 2015

The Economist published in this week´s issue (8 August 2015; http://t.co/vooavJq1np)  a cover story consisting of an editorial and a more detailed article challenging the effectiveness of the patent system to achieve its purpose, namely to foster innovation. As reasons for this failure the newspaper cites the abuse of the system by so-called “patent trolls” threatening businesses with lawsuits based on dubious patents and the alleged skills of patent lawyers to obscure rather than to disclose to the public the inventions protected by the respective patents.

As empiric evidence in favour or against the effictiveness of patents is notoriously hard to come by, the Economist concludes: “But a top-to-bottom re-examination of whether patents and other forms of intellectual-property protection actually do their job, and even whether they deserve to exist, is long overdue.” In the meantime the Economist suggests to reduce patent lifetimes, in particular in fast-moving technical areas as computer technology, and to run experiments with other forms of financing innovation alongside the patent system. While the former would deprive of protection inventors being ahead of their time such that their inventions become commercially relevant only towards the end of a patent´s 20-year lifetime, the latter suggestion surely sounds like a good idea. Governments could increase funding for reasearch (e.g. into drugs against rare diseases, which are not profitable for pharmaceutical companies) and publish the results without filing a patent application, thus handing over the publicly financed innovation to the public domain. This, however, can be done without any change of the current patent system.

In the discussion of the pros and cons of patents, however, I always and in this article in particular miss one point, namely the capability of patents to transform innovation into a defined, tradable asset.

Patent attorneys do the work of dissecting innovation into defined, manageable pieces and the examiners at the patent offices do the work of verifying whether or not a claimed invention is really new and non-obvious. Without patents, innovation can come only in two forms, either being published and thus part of the public domain and no longer a tradable asset, or kept secret by the innovator. A transaction to sell such kept-secret innovation would be enormously complex as the work to define the parts of the innovation/new technology being subject to the transaction and the work to value it would have to be done from scratch by the transaction parties thermselves, and without the help of patent databases. The information asymmetry between the innovator and potential technology seller keeping the secret about the (allegedly) newly developed technology and the potential technology buyer having no such knowledge would complicate things further.

Without patents, innovation would thus be a largely illiquid asset. For the economy as a whole the costs of the illiquidity of new technology as an asset would in my view by far outweigh the costs associated with patent lawsuits, in which only a tiny proportion of all granted patents are involved. I had expected that in particular the Economist, an outspoken supporter of free trade, would have taken into account this vital role of the patent system.

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