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Source link: http://archive.mises.org/10272/are-patents-monopolies/

Are Patents “Monopolies”?

July 13, 2009 by

On occasion you get some defender of patents who is upset when we use the m-word to describe these artificial state-granted monopoly rights. For example here one Dale Halling, a patent attorney (surprise!) posts about “The Myth that Patents are a Monopoly” and writes, ” People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.”

Well, let’s see. First, see my post Epstein and Patents, noting that the pro-patent Epstein writes:

Patented goods are subject to a lawful monopoly created by the state in order to induce their creation. No one thinks that new pharmaceutical drugs will be invented by private firms that cannot receive a rate of return sufficient to recover [various costs]. … The legal monopoly granted by the patent is the only mechanism that allows the producer to recover those fixed costs….

Is the pro-patent Epstein being dishonest?

And see my comments (1, 2) on The Three Stages of Invention post, excerpted below:First, as to whether patents are monopoly grants–hell, even the feds admit this: “Section 154 and related provisions [e.g. Sec. 271] obviously are intended to grant a patentee a monopoly only over the United States market….” U.S. Supreme Court, Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). See also: King Instr. v. Perego, by the Court of Appeals for the Federal Circuit (“Congress made the policy choice that the “carrot” of an exclusive market for the patented goods would encourage patentees to commercialize the protected inventions so that the public would enjoy the benefits of the new technology during the patent term in exchange for granting a limited patent monopoly. In other words, the public expected benefits during “‘the embarrassment of an exclusive patent as Jefferson put it.’” Graham v. John Deere Co., 383 U.S. 1, 10-11 (1966).)

See also Engel Ind. v. Lockformer Co. (“We hold that the disputed royalties provisions do not inappropriately extend the patent monopoly to unpatented parts of the patented system”); Carborundum Co. v. Molten Metal Eq. Co. (“A patentee, in demanding and receiving full compensation for the wrongful use of his invention in devices made and sold by a manufacturer adopts the sales as though made by himself, and therefore, necessarily licenses the use of the devices, and frees them from the monopoly of the patent.”)

And: Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947):

The Florida statute is aimed directly at the promotion of intellectual creation by substantially restricting the public’s ability to exploit ideas that the patent system mandates shall be free for all to use. Like the interpretation of Illinois unfair competition law in Sears and Compco, the Florida statute represents a break with the tradition of peaceful coexistence between state market regulation and federal patent policy. The Florida law substantially restricts the public’s ability to exploit an unpatented design in general circulation, raising the specter of state-created monopolies in a host of useful shapes and processes for which patent protection has been denied or is otherwise unobtainable. It thus enters a field of regulation which the patent laws have reserved to Congress. The patent statute’s careful balance between public right and private monopoly to promote certain creative activity is a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.”

Brenner v. Manson, 383 U.S. 519 (1966):

Whatever weight is attached to the value of encouraging disclosure and of inhibiting secrecy, we believe a more compelling consideration is that a process patent in the chemical field, which has not been developed and pointed to the degree of specific utility, creates a monopoly of knowledge which should be granted only if clearly commanded by the statute. Until the process claim has been reduced to production of a product shown to be useful, the metes and bounds of that monopoly are not capable of precise delineation. It may engross a vast, unknown, and perhaps unknowable area. Such a patent may confer power to block off whole areas of scientific development, without compensating benefit to the public. The basic quid pro quo contemplated by the Constitution and the Congress for granting a patent monopoly is the benefit derived by the public from an invention with substantial utility. Unless and until a process is refined and developed to this point — where specific benefit exists in currently available form – there is insufficient justification for permitting an applicant to engross what may prove to be a broad field.

Diamond v. Chakrabarty, S.Ct. (1980), Brennan’s dissent:

I agree with the Court that the question before us is a narrow one. Neither the future of scientific research, nor even the ability of respondent Chakrabarty to reap some monopoly profits from his pioneering work, is at stake. Patents on the processes by which he has produced and employed the new living organism are not contested. The only question we need decide is whether Congress, exercising its authority under Art. I, 8, of the Constitution, intended that he be able to secure a monopoly on the living organism itself, no matter how produced or how used.

Now you can argue that patent holders do not necessarily have “monopoly power” (see The Importance of Patents for Economic Development – 1999, by Prof. William Hennessey), but as Rothbard et al. have pointed out, the government’s concept of monopoly is flawed; the only issue that matters is whether there is a legal monopoly granted. See, e.g., Hoppe, A Theory of Socialism and Capitalism, ch. 9, pp. 185-86:

The monopoly problem as a special problem of markets requiring state action to be resolved does not exist. In fact, only when the state enters the scene does a real, nonillusory problem of monopoly and monopoly prices emerge. The state is the only enterprise whose prices and business practices can be conceptually distinguished from all other prices and practices, and whose prices and practices can be called “too high” or “exploitative” in a completely objective, nonarbitrary way. These are prices and practices which consumers are not voluntarily willing to pay and accept, but which instead are forced upon them through threats of violence.

See also Rothbard, Man, Economy, and State (with Power and Market): “The only viable definition of monopoly is a grant of privilege from the government.”

Now it is, indeed, clear that a patent is a monopoly grant to someone that permits them to charge above-market prices; this is exactly the goal of the patent law: to provide this monopoly profit to inventors so as to incentivize them to innovate and file for patents. And it is why, for example, Blackberry paid over $600 million to NTP in a recent patent suit; and it is why consumers will have to pay more for Blackberry services than they otherwise would, etc. Did NTP have “monopoly power” as defined by the government’s antitrust scheme? I don’t know. Probably not. But did they extort RIM/Blackberry by use of the government-granted patent monopoly? Of course.

See also Arnold Plant, The Economic Theory Concerning Patents for Inventions, sections 16, 19, 20, 24:

The patent system may, on the one hand, be expected to affect the making of inventions in two ways. The first is to divert inventive activity into those fields in which the monopoly grant will be expected to prove most remunerative. It may, secondly, affect the total amount of inventive activity.

… the utilitarians assumed that the patent system was responsible for the greater part of inventing activity. The question which they one and all failed to ask themselves, however, is what these people would otherwise be doing if the patent system were not diverting their attention by the offer of monopolistic profits to the task of inventing. By what system of economic calculus were they enabled to conclude so definitely that the gain of any inventions that they might make would not be offset by the loss of other output? By no stretch of the imagination can the inventing class be assumed to be otherwise unemployable. Other product which is foregone when scarce factors are diverted in this way completely escaped their attention.

… at the beginning of this century Professor J. B. Clark was still writing: “If the patented article is something which society without a patent system would not have secured at all – the inventor’s monopoly hurts nobody… His gains consist in something which no one loses, even while he enjoys them.”? No inkling here that the patent inducement to invent diverts scarce human effort from other production, and that the subsequent exploitation of patents again interferes with the disposition of scarce factors which would obtain under competitive conditions.

… It seems unquestionable not only that a very considerable volume of inventive activity must definitely be induced by price conditions, but also that that activity is diverted by price movements from other types of endeavour as well as from other fields of invention. Entrepreneurs faced with new difficulties or with new opportunities will divert not only their own attention, but that of every technician who can be spared, from the business of routine production to that of urgent innovation. They will not rely exclusively upon those types of professional inventors whose autonomous output pours out in a stream of unvarying size, and some of whom may be prepared, in return for the inducements which the entrepreneurs can offer, to transfer their spontaneous activity to their service. It cannot be assumed that all who are capable of innovation spend their whole lives in inventing. Many of them are also able administrators and production controllers; some in the past have been clergymen and barbers, and in our own time there is a steady flow of technicians from the research laboratories of pure science into those of industrial invention and out again. … The patent system … enables those who “have the monopoly of the right to use a patented invention to raise the price of using it … and in that way to derive a larger profit from the invention than they could otherwise obtain. The effect must surely be to induce a considerable volume of activity to be diverted from other spheres to the attempt to make inventions of a patentable type. [emphasis added]

See also Rothbard, Man, Economy, and State, ch. 10, sec. 7:

It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. . . . Research expenditures are therefore overstimulated in the early stages before anyone has a patent, and they are unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system then has the further effect of artificially stimulating research expenditures in the patentable areas, while artificially restricting research in the nonpatentable areas.

Update: See “Ideas Need Protection: Abolishing Intellectual-property Patents Would Hurt Innovation: A Middle Ground Is Needed,” by William F. Shughart II, a senior fellow with the Independent Institute, The Baltimore Sun (Dec. 21, 2009):

Granting a temporary monopoly to the rare breakthrough is necessary, therefore, to provide its inventor with an opportunity to earn a return on the investment that led to the new idea – and to encourage additional such investments. Such protection is especially important in the pharmaceutical industry, where, in its absence, new drugs could be duplicated by competitors, and the incentive to invest would disappear, stifling the discovery process.

To paraphrase the late economist Joan Robinson, patents and copyrights slow down the diffusion of new ideas for a reason: to ensure there will be more new ideas to diffuse.

Update: It is interesting to note that one of the first patent statutes was England’s Statute of Monopolies of 1623.

Update: New York Law School professor Beth Noveck, quoted in an article on improving the U.S. patent system, admits: “A patent is a pretty significant monopoly, so we want to make sure we are giving it to the right people.”

Update: See my post IP Rights as Monopolistic Grants to Overcome the Public Goods Problem.

Update: As I note in Canada’s Founders Debated Justification for Patents, Canadian Sen. Jean-Charles Chapais, the agriculture minister, in introducing legislation for a Canadian patent law in 1869, readily admitted the monopoly nature of patents:

It must be remembered that a patent is a kind of monopoly, though he did not mean to say that the word monopoly should be taken in its fullest sense, but nevertheless it is a monopoly, because it gives to a man the right of manufacturing or vending alone, an article useful to the public; certainly there was great reason for granting this monopoly.

Update: In Thomas Jefferson’s Letter to James Madison, August 28, 1789 (On the liberty to write, speak, and publish and its limits), he proposes to James Madison, then in the process of drafting the Bill of Rights, that the following be incorporated into the Bill of Rights:

Art. 9. Monopolies may be allowed to persons for their own productions in literature and their own inventions in the arts for a term not exceeding — years but for no longer term and no other purpose.

This was written just shortly before the Constitution itself was to be ratified. It appears to be aimed at adding a limit on how many years Congress could grant patent and copyright monopolies for. The copyright and patent clause in the then-pending Constitution had no outside limit on how long the patent and copyright monopoly grants could be, providing: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Jefferson apparently wanted the “limited time” to be capped at some maximum number of years (probably 14 or 21 years or so). If he had got his way, (a) it would be clearer to everyone that patent and copyright are monopolies, and (b) Big Media and Mickey Mouse would not have been able to extend the copyright term to its current 100+ years.

See also Alex Tabarrok, Launching the Innovation Renaissance (which I discuss here):

Innovators need time to recoup their sunk costs, but why should every useful, non-obvious and novel idea be granted a 20-year patent? Maximizing innovation requires treating different industries differently. The idea for one-click shopping does not have the same sunk costs of research and development as a new pharmaceutical, and the former does not need and should not be given the same monopoly rights as the latter. [Tabarrok, Alex (2011-11-21). Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast (Kindle Locations 241-243). TED Books. Kindle Edition.]

{ 19 comments }

Silas Barta July 13, 2009 at 1:38 pm

Physical property rights are also a government-granted monopoly that allows the government-designated owner of the property to dictate who may or may not use it, and thus charge a price much higher than if people could just take the property.

Game, set, match.

Matthew July 13, 2009 at 1:47 pm

Silas: “Physical property rights are… a government-granted monopoly….”

Not in the libertarian conception of property rights. You acquire property by homesteading or voluntary trade. Government edicts fall in neither category.

Dale Halling July 13, 2009 at 1:48 pm

Stephan, the reason we get upset when you call a patent a monopoly is that it is not intellectually consistent. A monopoly is a government granted right to a market – such as a utility company. A patent does not provide a right to a market, in fact it does not even give you the right to sell your invention.

Quoting case law that uses the word monopoly does not prove the point, it just shows that many judges do not understand patents either.

Rafael Garcia July 13, 2009 at 2:25 pm

Dale:

A utility company is granted a monopoly on the local market for electricity, for example. A pharmaceutical company with a patent on Zyban is granted a monopoly on the national market for bupropion HCl. Government restriction of free entry is what creates a monopoly, not a confused definition of what constitutes a “market”.

Angus July 13, 2009 at 2:37 pm

“Physical property rights are also a government-granted monopoly that allows the government-designated owner of the property to dictate who may or may not use it, and thus charge a price much higher than if people could just take the property.”

Physical property rights can be granted by government, but it certainly isn’t a requirement – unlike patents.

Stephan Kinsella July 13, 2009 at 2:37 pm

Silas Barta:

“Physical property rights are also a government-granted monopoly that allows the government-designated owner of the property to dictate who may or may not use it, and thus charge a price much higher than if people could just take the property.”

First, property rights can exist without the state; artificial, legislatively created IP rights cannot (many of its supporters in effect concede this–see point 5 of Objectivist IP lawyer Murray Franck’s reply to me; Regret: The Glory of State Law; and Inventors are Like Unto …. GODS…..).

Second: property rights in scarce resource are justifiable, but those in IP are not. In fact the only way to grant a right in IP is to take away already-existing property rights to already-homesteaded scarce resources.

Double fault.

Dale Halling:

“Stephan, the reason we get upset when you call a patent a monopoly is that it is not intellectually consistent.”

I don’t think so. I think the reason you get upset is you don’t like the statist racket you support being called what it is. Statist policies are always dressed up in some euphemistic language.

“A monopoly is a government granted right to a market – such as a utility company. A patent does not provide a right to a market, in fact it does not even give you the right to sell your invention.”

It’s only a matter of degree. The patent grant allows the inventor to extra extra-market–monopoyl–prices. No one denies this.

“Quoting case law that uses the word monopoly does not prove the point, it just shows that many judges do not understand patents either.”

So–the judges of the very system that you guys want to trust to administer … justice [sic] … are too ignorant of economics to even understand the …. rights [sic] they are enforcing? Sounds like a great plan to me!

Renegade Division July 13, 2009 at 2:56 pm

A monopoly is a government granted right to a market – such as a utility company. A patent does not provide a right to a market, in fact it does not even give you the right to sell your invention.

So Dale what you are saying is that if govt makes it a law that only AT&T has a right to provide cell services to American people(and no other company), then that is Monopoly, but if govt makes it a law that AT&T has the right to provide licenses to other Wireless companies(T-Mobile, Verizon, Sprint), and they must pay AT&T a certain amount of fee, then this is not a monopoly because the AT&T is not given the right to sell this right?

Now to me the above sounds like intellectual dishonesty. It could be that I played with words, but then you can correct me.

jason4liberty July 13, 2009 at 3:52 pm

In fact, a granted monopoly on utilities does not completely restrict my ability to generate or purchase electricity in other ways. I can buy a gen set and fuel. I can use solar power (he he). I could invest in fuel cells.

A patent monopoly is a greater monopoly than the granted monopoly in utilities. It is more like the granted monopoly on the production of money. With a patent, I am completely excluded from the utility of the invention unless I purchase an authorized use from the patent holder. That is more like preventing me from utilizing electricity than preventing me from contracting with another utility provider. The granted license that you refer to in utilities is much less restrictive than a patent monopoly.

Doc Brown July 13, 2009 at 4:07 pm

A Patent is a monopoly, limited in time, granted in exchange for allowing the information to fall into the public domain at the end of the patent period, and to be made known to the public one year after application.

The patent is bargain or free exchange granted to encourage inventors to reveal their proprietary information for the long term benefit of society (whether that works is another debate).

Without patents, some inventors would be more likely to maintain viable inventions as trade secrets. Inventors of a new energy generation system would maintain the generators in locked and guarded buildings, and just sell the electricity. Pharmaceutical manufacturers would run clinics where patients could come and be treated with their secret formula. (It is clear that in many cases, (e.g. household gadgets), this would not work.)

Doc Brown July 13, 2009 at 4:21 pm

So how does that bargain affect innovation?

I am working on a novel type of green energy source. It is such interesting work that I would personally be compelled to do so whether patents existed or not.

However, it is not clear to me that I would have been able to raise the investment necessary to pay for the work had some form of intellectual property protection not been available.

Additionally, my work is partly based on detailed technical information available in other published patents. Would this information have been so easily available to me had patents not existed?

I don’t purport to know the answers to these questions. I’m just reporting personal experience.

Joe July 13, 2009 at 4:39 pm

“Without patents, some inventors would be more likely to maintain viable inventions as trade secrets. Inventors of a new energy generation system would maintain the generators in locked and guarded buildings, and just sell the electricity. Pharmaceutical manufacturers would run clinics where patients could come and be treated with their secret formula. (It is clear that in many cases, (e.g. household gadgets), this would not work.)”

And what prevents this from happening? They could have just as easily not filed a patent, but their actions obviously show that it is much more enticing to file a patent and gain a monopoly.

What about the case where several companies in competition are trying to come up with some new technology at the same time? The one who wins the patent is awarded the monopoly of this I.P. If this is a very important patent and allows a great competitive edge in the market, it could severely hinder the performance of its competitors by placing a restriction on them that they cannot use the technology they have been investing in because a patent for it had just been filed.

“Additionally, my work is partly based on detailed technical information available in other published patents.”

This system is only made possible by the government monopoly on I.P. Had there been no government monopoly, such information would be accessible by other means.

I’ve got a potential answer for your problem: keep the secrets to yourself, and only show what you need to show in order to sell those secrets to another firm at a price you would both agree to.

David Spellman July 13, 2009 at 7:40 pm

A circus tent is a primitive method of protecting intellectual property. If it were not for the tent, anyone could enjoy the circus act free of charge. The circus impresario has homesteaded his property and successfully protected it to extract wealth without the need for government force.

I would gladly end state-sanctioned monopolies in favor of libertarian methods of enforcing intellectual property rights. Ingenious inventors and artists will provide “circus tents” to control their property and extract wealth. Arguing that intellectual property should be free isn’t going to make anyone produce it for free.

Jon Bostwick July 13, 2009 at 11:25 pm

No one is arguing in favor of “free ideas”.

They are arguing against using violence to force individuals to act in a way that will make them worse off so that others can be made better off. I believe we have a name for that.

Conza88 July 14, 2009 at 1:32 am

Silas, how can the State say it protects property, when it must violate property to exist?

Nuke Gray July 14, 2009 at 1:51 am

Conza88- read your Holy Declaration of Independence! Governments (thus also States) are designed to protect people’s rights! If they ever become destructive, ONLY then can you try to change them! It says so. right there!
In the great days of your founding documents, men were men, women were servants, and blacks were slaves. Those were the days!

Greego July 14, 2009 at 7:09 am

I think the distinction that the pro-IPers miss is that patents (and all forms of government monopoly) apply to classes (ie, all instances) of goods or services, whereas property (and contracts) apply to finite instances of goods or services within the legal jurisdiction in which such rights are protected. This invalidates IP/property comparison arguments such as the one made by Silas Barta in the first comment. You can’t give ‘property’ over classes of goods and services without breaking rights over individual goods and services that already exist (or will exist in the future). Not to mention that such classes can overlap if the IP/monopoly systems are poorly designed or poorly regulated (eg multiple patents covering the same or similar inventions.) By increasing the number (and complexity) of potential claimants a mixed ‘class’ & ‘instance’ property system increases conflict over scarce goods, whereas property/contract rights by themselves (an ‘instance’ system) minimises conflict.

Peter Surda July 14, 2009 at 9:37 am

@Silas Barta:
> Physical property rights are also a government-granted
> monopoly that allows the government-designated owner
> of the property to dictate who may or may not use it.
Let us first delete the word “government”, because it is leading the discussion astray.

If I try to analyse your claim thoroughly, then I must conclude it is incorrect. The “monopoly feature” of (classical) property is not its inherent component, rather it is a side effect caused by the object being rival. The monopoly is not a consequence of property rights per se. If you apply the same set of rules to non-rival goods, there is no monopoly.

As for the justification, while a monopoly makes at least theoretical sense as a potential solution to the problem of overconsumption in rival goods, it makes no sense for non-rival goods, because there can be no overconsumption (from economic point of view).

> … and thus charge a price much higher than if people
> could just take the property.
Although you are correct than in both cases the price the thief (real or imaginary) charges is lower in short term, the rest of your argument makes a very poor analogy. If you steal (classical) property from someone, they cannot sell it for any price, even give it away for free, for the simple reason that they don’t have it anymore. Selling in that case is not just a question of profitability, it is logically impossible. If on the other hand you “steal” IP from someone, ceteris paribus, while the market price and revenue is down and profitability might be in danger, there are no other factors preventing you from selling. Lower revenue is hardly a conclusive argument. There are a lot of activities that have a negative effect on the revenue of your competitors (I posted some of them a couple of weeks ago), have nothing to do with property at all, and are fully legal regardless of IP laws. Therefore, one cannot conclude that activities causing the decrease of your competitor’s revenue are evidence of wrongdoing.

Cheers,
Peter

Peter Surda July 14, 2009 at 10:06 am

@Dale Halling
> A patent does not provide a right to a market, in fact
> it does not even give you the right to sell your invention.
(emphasis added)

I would like to thank Dr. Halling for getting it right, it is obvious that he is an expert and knows what he’s talking about, unlike a lot of self proclaimed IP proponents contributing here, whose ideas about IP have nothing to do with reality. If you don’t mind, I’ll use this quote as an expert reference in my future arguments.

If I may add an explanation of the word monopoly, the Austrian School of Economics uses the term “monopoly” in cases where competition is prohibited by (the initiation of) force. The actual number of market participants is irrelevant, it can be five, one or even zero. If the low number of market participants is a result of a cause other than force, for example, physical limitations or a cunning business strategy, then the Austrians wouldn’t use the term. However, the definition still applies to both the examples you mentioned (one participant versus zero participants).

Using this definition, the position of IP opponents is logically consistent.

Cheers,
Peter

Nick Robinson August 1, 2009 at 1:26 am

Hi there,

I found your blog post very interesting.i am Nick Robinson,a community member at http://www.patents.com / Will like to talk(through email) to you,is this the right time to talk about or should we talk during weekends ?

Best-Regards,
Nick Robinson

nickrbson@gmail.com

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