In Bessen & Meurer latest patent study (“Do patents perform like property?,” Academy of Management Perspectives, pp. 8-20 (August 2008)), the authors conclude: “intellectual property rights have at best only a weak and indirect effect on economic growth” and “The direct comparison of estimated net incentives suggests that for public firms in most industries today, patents may actually discourage investment in innovation.”
The entire conclusion is below. See also Keith Sawyer’s post, Do Patents Increase Innovation?, who note: “In 1999, for example, the total profits from patents in all U.S. public firms (excluding pharma) was about $3 billion, but their litigation costs associated with those patents were a whopping $12 billion!“
The historical evidence, the cross-country evidence, the evidence from economic experiments and estimates of the net benefits of patents all point to a marked difference between the economic importance of general property rights and the economic importance of patents or intellectual property rights more generally. With the cross-country studies in particular, the quality of general property rights institutions has a substantial direct effect on economic growth. Using the *same* methodology and in the *same* studies, intellectual property rights have at best only a weak and indirect effect on economic growth.
The research also suggests a reason why patents differ from general property rights in motivating economic growth overall: the positive effects of patents appear to be highly contingent. Differences in technology and industry seem to matter a lot for twentieth century R&D managers and also for the innovative performance of nineteenth century world’s fair exhibitors. Some results from the cross-country studies suggest that less developed countries have a harder time realizing benefits from patents or that countries that participate actively in international trade may benefit more.
Some of these differences arise because of differences in the relative costs and effectiveness of alternatives to patents. Patents may contribute more to economic growth in the pharmaceutical industry than they contribute in electronics industries because the latter can more effectively earn returns on innovation through lead time advantage, sales of complementary products and services, etc. Other differences may arise because of subtle differences in patent institutions. During the nineteenth century, the US patent institutions performed differently (and perhaps better) than their British counterparts. Patents are likely to work better in the pharmaceutical industry because patents on chemical entities have much sharper boundaries than, for example, patents on software.
Of course, the economic effectiveness of all forms of property depends on details of the supporting institutions–this is evident from the disparate growth paths of Soviet Bloc economies. But the economic effectiveness of patents may be much more sensitive to the details of the relevant institutions than are general property rights. Perhaps this is because patent law may be much more specialized, complex and sophisticated than, say, real property law and, so, effective institutions may be more difficult to develop and maintain.
In any case, the empirical economic evidence strongly rejects simplistic arguments that patents universally spur innovation and economic growth. The direct comparison of estimated net incentives suggests that for public firms in most industries today, patents may actually discourage investment in innovation.
I cross-posted this at Against Monopoly. David Levine has an interesting reply in the comments. In response to one commenter, Lonnie Holder, who had criticized Bessen & Meuer, Levine replied:
I think there is some confusion here. I don’t know of any economist who thinks that there are no circumstances under which an innovation might occur more quickly if there is a possibility of patenting it. That doesn’t answer the question of whether on balance patent systems help or hurt innovation. The evidence suggest that the positive and negative effects of patents are basically a wash. I’m not sure why you focus on one piece of their evidence, that about patent litigation costs, which is about two pages in a 25 page paper. Nobody would suggest that this single piece of evidence is especially decisive.
It doesn’t seem very sensible to argue we should have a patent system because occasionally it speeds innovation. In fact a patent system has many downsides, which from various posts, I think you agree with Lonnie. The only reason I can see to put up with these downsides is because the system leads to substantially more innovation than we would have without it. If the government is going to intervene in private markets, enforcing private exclusivity rights (if you prefer that to monopoly), don’t we want strong evidence that this accomplishes the desired goal? If you believe in small government, then surely you want strong evidence that a policy accomplishes the desired goal before supporting it. Picking nits with Bessen and Meurer misses the point. If the system works at all well, it shouldn’t be hard to find evidence that it does that. There are plenty of economists who think patent systems are a good idea – including Bessen and Meurer who would like to see patents rolled back but not eliminated – but we haven’t found any study by any economist of any persuasion that has evidence for anything beyond the assertion that “weak patents may have a mildly positive effect on innovation.”
Finally, I can’t parse your last paragraph, maybe something got left out? What is the inconsistency between the proposal that mature industries file for increased patent protection – a fact that jumps out of the data – and the fact that large numbers of firms favor weaker patents? Firms can be found in large numbers on both sides of the patent divide. Indeed, one reason patents haven’t flown out of control the way copyrights have is because there are interests well represented on both sides.