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Source link: http://archive.mises.org/9368/the-hoax-of-invention-history/

The Hoax of Invention History

February 3, 2009 by

[Chapter 8, live blog]

All popular business histories are replete with lies. Or to be more charitable, they are filled with untruths based on a stupid version of cause and effect: inventions happen because people take out a patent on them. This assumption is hardly ever questioned in the mainline literature. Writers look through patent records and assume that they are a record of technological advance.

The truth is far messier. The patent records are a snap shot of those who filed a patent, and nothing more.

It is because of patent-based historiography that people believe that the Wright Brothers invented the airplane, when in fact they made only a tiny contribution of combining wing warping with a rudder. It was Sir George Cayley in Britain and Otto Lilienthal of Germany who did the bulk of the work of inventing the airplane. But it was the Wright Brothers who applied for the patent and quickly used it against Glenn Curtiss who improved wing warping with movable control surfaces.

So it was with the radio, which is conventionally attributed to Guglielmo Marconi, the Nobel Prize winner in 1909. What about the contribution of Oliver Lodge in the UK or the forgotten genius Nikola Tesla or the Russian Aleksander Popov or the British Naval engineer Henry B. Jackson?

All Marconi did was ground the antenna, and also manage to win the patent wars thanks to the deep pockets of fellow aristocrat and partner Andrew Carnegie. Fifty years after the patent was granted, the Supreme Court conceded that it was unjustly given but by then, the other claimants were dead! (Marconi was consistent at least: he was a big supporter of fascism in Italy.)

Then there is the famous myth about Alexander Bell that displaced knowledge of the real inventor of the telephone, Antonio Meucci. But Meucci couldn’t afford the fee to file the patent. This oversight was fixed in a 2002 declaration by the U.S. Congress but just a bit too late.

There are an unlimited number of such cases that lead to fundamental questioning of the relationship between patents and innovation. It turns out that there are very few great leaps forward in history that are the result of a single Prometheus-style figure. Most advances are the cooperative work of many factors alive in society, with individuals improving things a bit at a time until all those improvements come together in a marketable form.

The patent has essentially nothing to do with it. And Boldin and Levine are hardly the first to point this out. You might be surprised to know that many academic economists have done empirical studies on the relationship between patents and economic advance. Of all those studies they reviewed, 23 in total, they found none that could establish a strong relationship and many that found negative relationships between patents and development: that is, that patents actually impede progress.

What they further find is that the main contribution of patents is to increase the production of patents. But that is not the same as increasing invention, for the main use of the patent is to put a stop to any similar innovation that builds upon and improves the patented thing. The patent holder rides high for a time but history is actually frozen in place. The process of imitation and sharing that led to the innovation becomes formalized, centralized, fixed, and stagnant.

They examine the case of databases, which are patented in Europe but not in the United States. The U.S. wins the competition easily. The American dominance of database production runs 2.5:1 compared with Europe. To me, this helps explain what many have noticed, namely that Europe is seriously behind in its digitalization and organization of information, with most Europeans possessing oddly antiquated intellectual capital concerning even the most basic databasing skills. Now we know: it’s not their fault; it’s the fault of their IP regimes.

Thus does chapter eight of Against Intellectual Monopoly discuss all the existing literature that makes the case–on purpose or inadvertently–against patents. It is packed with empirical detail, but in particular I’m intrigued at their review of the history of musical composition in England Europe in the 18th and 19th centuries.

They find that the countries with no copyright legislation (German territories in particular) had more composer per capita than countries like England. And in England in particular, the 1750 law had the effect of bringing the entire composition industry to a grinding halt. And later, when copyright was imposed on Italy and France, it led to a diminution of composer effort.

This demonstration is intriguing beyond most music historians can possibly imagine. It solves a long-running mystery as how it came to be that the most musically educated population in the world, one with a massive history of compositional genius, would suddenly fail to participate in the progress that defined the age of Mozart and Beethoven. These historians just haven’t known where to look for clues.

This chapter makes me sad for all the great innovators whose names are not in the history books, and even sadder for all of us who have been denied great innovations because some fool managed to make it to the patent office first only to use that privilege to kill his competition the next day. Far from encouraged innovation, patent and copyright have managed to kill off so many wonderful works of art and technologies that it boggles the mind. In order to understand this, you have to look beyond the patent records. You have to train yourself to look at the unseen costs of government regulation.

{ 74 comments }

newson February 6, 2009 at 9:22 am

to le holder:
even with the current regime, distribution counts for a lot. most creators don’t see a lot of money for their works. however, the extra costs imposed by the legal structure that goes with ip, must ultimately mean less consumption.

financial success in the arts will always be part entrepreneurial skill, part creative talent. why should the government assist the poorer entrepreneurs in the arts, any more than their counterparts on wall st?

Lonnie E. Holder February 6, 2009 at 12:09 pm

newson

You mention the “extra costs” imposed by the legal structure that goes with IP. As I noted before, the “extra costs” with respect to hydrostatic transmissions is, by my estimate, about 20 to 50 cents per unit. What the market got in return is an initial investment of 40 to 60 million dollars in a stagnate market, and cost reductions over the prices that existed at the time totalling, again by my estimate, more than a billion dollars. I personally think the billion dollars saved is worth far more than the several million expended in the “IP system,” as you call it. Rather than reduce sales, sales of these units have exploded and have become particularly dominant in zero turn consumer units, which were a teeny fraction of the market a decade ago. Now those units have sales measured in hundreds of thousands. Less consumption under IP? How about consumption that measures in the millions under IP that was previously at about 10,000 units per year or less.

I also think that the explosion of technology in this stagnate arena has already reaped benefits by stimulating new competition and an expansion of the original technology. Within a few years, all that technology will be available for the taking and the dinosaurs in the industry will be able to use that technology freely, if they can.

As for supporting Wall Street, they are already supported by IP. Do they really need more money? It is sad that a couple of executives on Wall Street can get more in bonuses than Hydro-Gear earns in revenue (total dollars in sales) in a year. At least Hydro-Gear is providing a product that the market wants.

newson February 6, 2009 at 7:03 pm

to le holder:

first, if your industry is stagnant, and ip has given rise to investment, it does not follow that this is beneficial to the economy. your stagnation is being subsidized by a more vibrant area of the economy, less dependent on ip protection but forced to pay its cost, nonetheless.

second, you seem to be arguing that one or two years lead time would be not result in profits sufficient enough to justify the investment. this does not make sense. if the ephemeral monopoly profits, plus the later normalized returns don’t justify the outlay, then the project doesn’t merit the green-light.

i recommend reading petra moser’s piece which shows how non-ip countries did surprisingly well in the innovation stakes in the nineteenth century. these countries were in direct competition with ip regimes like britain and the us, and yet managed to punch above their weight. the lack of legal protection encouraged different modes of investment, and in areas where reverse engineering was more problematic.
http://web.mit.edu/moser/www/pat501.pdf

Lonnie E. Holder February 7, 2009 at 10:02 am

newson

first, if your industry is stagnant, and ip has given rise to investment, it does not follow that this is beneficial to the economy.

Neither does it follow that it is not beneficial to the economy. I would argue that the expansion of technology, the significant reduction in prices, and the attendant consumer demand demonstrates that the economy appreciated the results. Since other portions of the economy had equal opportunity to use patents, this industry was subsidized no more and no less than any other industry at the same time, further indicating that your argument has weakness.

your stagnation is being subsidized by a more vibrant area of the economy

Unproven hypothesis. Worse, pure speculation.

less dependent on ip protection but forced to pay its cost, nonetheless.

You could make this argument regarding trade secrets, since some portions of the economy are able to use trade secrets and others are not. Thus, secrecy in business should be abolished too. Of course, that can never happen, until we turn into a dictatorship.

second, you seem to be arguing that one or two years lead time would be not result in profits sufficient enough to justify the investment. this does not make sense.

Why does this not make sense? There are hundreds and thousands of industries where a two year lead time makes little or no sense. If you wish an extreme example, take the aircraft industry. Payback for the development of the 747 was more than a decade. How about the Toyota Prius? That product was a losing proposition for the first several years, and it took more time to put the investment in the black. Of course, the investment was clearly justified given that the Prius is one of the better selling cars, now, but initially many “experts” wondered whether it was going to be another novelty or something that sparked consumer interest. The Prius could easily have been an expensive experiment that failed, but Toyota gave it the years it needed to develop a market. Fortunately, the Prius was HEAVILY protected by patents, so someone else could not walk in a copy it, and they still cannot.

if the ephemeral monopoly profits, plus the later normalized returns don’t justify the outlay, then the project doesn’t merit the green-light.

I never said that “ephemeral monopoly profits,” whatever those may be, plus later normalized returns, whatever those may be (which, as YOU well know, are absolutely undefinable), did not justify the outlay. In fact, I am not sure there ever were “monopoly profits.” If you are in a competitive industry sensitive to price, which is a significant factor, and the only thing limiting competition is that your exact design is unavailable, then how are monopoly profits available? In fact, there is incentive by the other competitors to reduce price with their products to attempt to win the market. However, the market will decide which combination of features and price will win, and imaginary “monopoly profits” are unacceptable.

i recommend reading petra moser’s piece which shows how non-ip countries did surprisingly well in the innovation stakes in the nineteenth century.

Is that an indictment of intellectual property, or evidence that other systems can work? Does every country need to be a democracy? Does every country need an army? You compare apples and oranges. Success of one system does not automatically mean another wrong or inappropriate; it just means there is more than one system. In evolutionary terms, the various systems are in competition. In the long run, the most desirable system should win.

these countries were in direct competition with ip regimes like britain and the us, and yet managed to punch above their weight. the lack of legal protection encouraged different modes of investment, and in areas where reverse engineering was more problematic.

Good for them. As I noted above, the existence of one system does not prevent the existence of other systems. Competition between the systems should determine which is the best system in the long run.

MLS February 8, 2009 at 12:40 pm

Mr. Holder,

Perhaps you share the same view, perhaps not, but quite frankly I so find many of the above comments based upon misinformation and lack of real world experience that it scares me to think so many are prepared to accept the Boldrin/Levine publication at face value without any attempt to ascertain if the data being used to support their propositions are even relevant. I have not the slightest doubt I could select an input data set, analyze it, and then arrive at the conclusion that we exist as organisms because patent law exists. Of course this would be stupid and intellectually dishonest, and the conclusions even more so. At least I admit so. It is a shame that those on the other side of the aisle stubbornly refuse to do the same.

newson February 8, 2009 at 4:55 pm

to mls:
maybe you should listen to this debate hosted by the cato institute, where a pro-ip’er takes on michele boldrin, and where the latter defends his study. it addresses the doubts you have expressed about evidence.
http://www.cato.org/event.php?eventid=5362

Lonnie E. Holder February 8, 2009 at 7:27 pm

MLS:

I too find issue with Boldrin & Levine’s study. The beginning of the study is absolutely atrocious in that it assumes that IP is undesirable and then sets out to “prove” it. As anyone familiar with statistics and logical proof knows, you assume the opposite of what you wish to prove, for reasons that those familiar with proofs know.

Then, once we get into the heart of the matter, they manage to ignore every piece of data that would tend to refute their position, which of course is far from objective. For example. there is a marvelous study of the value of the Plant Variety Protection Act on cotton. More recently, there is a paper on a similar act implemented by the Chinese to address an issue in their own country regarding lack of new plant development. Boldrin and Levine, on the other hand, use something like “Total Productivity Factor” or something like that. The problem with their “factor” is that it neglects underlying problems in agriculture that, without new plant development, would cause reduction in crop yields. However, their lovely little curve shows that the increase in yields was smooth before and after the act. Surprise, surprise.

They also neglect to point out that many of the plants developed after the act were flowers, which has zero affect on their “factor.”

Lastly, in their zeal for “proving” their point (which means ignoring any evidence to the contrary), they neglect the fact that new plant development increased by a factor of 20 after the act, which had dramatic and positive economic effects in several portions of agriculture.

As for the response from newson, I would point out that Albert Einstein was not known for his ability to debate, but it is well known that he knew what he was talking about. Just because Michele Boldrin is a good debater does not make him any more correct in his position, and certainly does not make up for the flaws in the study performed by him and Mr. Levine.

newson February 8, 2009 at 8:29 pm

le holder says:
“As for the response from newson, I would point out that Albert Einstein was not known for his ability to debate, but it is well known that he knew what he was talking about.”

yeah, right. “The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil.” (albert einstein: “why socialism” 1949).

back you your previous comment; that a subsidy produces benefits to some area is not questioned. you seem to imply that because a “stagnant” (your word, remember) area is revitalized, that has an overall benefit to the economy. this of course ignores that everyone pays the cost of the ip legislation, formulation and policing, not just the beneficiaries.

you argue without ip, the 747 and the prius likely would not have arisen. this is pure conjecture, but even if this were the case, so what?

trade secrets are a genuine libertarian approach to creating scarcity value of ideas. all costs are internalized, not socialized. if innovators are able to maintain secrecy, good on them. they’ll enjoy monopoly profits for as long as this is true.

it would be good to see both your detailed methodological critique and b&l’s reply, should that be forthcoming.

i’m going to leave others to discuss the plant variety protection act, as i see is already the case on the b&l blog.

MLS February 8, 2009 at 9:44 pm

Newson,

I watched the video when it was originally released. The individual who followed Mr. Boldrin did not present a persuasive case, but then again neither did Mr. Boldrin.

My problem with the work he co-authored with Mr. Levine is that the data set they chose to examine is largely meaningless. Their work would most certainly benefit from their sitting down with a lawyer who truly understands the pertinent law, one who is neither pro nor anti-patents and copyrights, and working in concert to identify truly relevant data upon which their research should rely.

I do not want to be viewed as “picking” on the authors because the same criticism can be leveled at most researchers dealing in this subject matter area…both those who conclude IP is “bad” and those who conclude IP is “good”. Quite frankly, I am not at all sanguine that the “goodness” or “badness” of the IP regime can ever be answered conclusively. Based upon my experience, the only intellectually honest answer that can be given is a resounding “I/We do not know.”

Lonnie E. Holder February 8, 2009 at 10:03 pm

newson:

You state boldly that everyone pays for IP. I respectfully disagree. No one needs to pay for IP that chooses not to pay. Do the Amish pay for IP? In general, no. Does a person who buys a home and puts furniture into it pay for IP? No. The vast majority of people who pay for IP do so because they choose to do so. Consider this the next time you purchase something that is patented.

Of course, then there is the question of how much people pay. If IP costs $1 million, and saves $1 billion (which has happened), then what is the cost of IP? Is it negative? Does that mean that everyone who has received the benefit of that IP gets a positive benefit from that IP?

Here is a conundrum. There are people who are anti-IP who claim, without proof, of course (it is easy to assert a position without evidence) that without IP a market would have provided the same solution. What this means, of course, is that IP in fact provided a quantifiable benefit. Saying that a free market would have provided the same benefit is merely providing another route to achieve the same end, a route that, I might add, also contributed to some of the worst ills ever bestowed on mankind. I leave you to review history regarding free markets and some of the many ills that free markets led to.

newson February 9, 2009 at 8:50 am

le holder says:
“No one needs to pay for IP that chooses not to pay. Do the Amish pay for IP? In general, no. Does a person who buys a home and puts furniture into it pay for IP? No. The vast majority of people who pay for IP do so because they choose to do so.”

nothing bold about it: to the extent that amish pay taxes, they support the ip structure. ditto joe newhomer.

the vast government apparatus that is required to draft the laws, and police the regulation is a drain on all taxpayers. the costs of compliance, and the monopoly rents that ip provides are incorporated into the price of goods.

even someone who grows turnips perhaps uses a fertilizer that has a patent cost, and probably consults the turnip-growers’ manual that has a copyright cost added in.

Lonnie E. Holder February 9, 2009 at 12:12 pm

newson:

You need to quantify the “vast government apparatus that is required to draft the laws.” Because IP laws are such an infinitesimally small portion of government, I suggest that if IP laws were completely abolished not one penny would be saved in taxes.

As for “policing the regulation,” there is no policing if non-criminal IP laws because it is up to the holder of IP to pursue such measures at their cost in court.

Any other costs are, as you said, incorporated into the prices of goods covered by intellectual property, which, as I noted before, is your choice to buy or not buy. There are far more products not covered by IP than there are covered by IP, so choices are plentiful. However, you will likely not figure that out by price, since products covered by IP are just as often cheaper than non-IP products as they are more expensive.

The Amish use natural fertilizer, and to the best of my knowledge there are no patented fertilizers. At least, none of the fertilizers I use are patented. I would need to be convinced that the turnip grower’s manual has a single penny added to it because of copyright.

MLS February 9, 2009 at 1:02 pm

Mr. Holder,

Merely as a side note, the USPO went PAYG back in the early 80′s, at which time it turned into a profit center from which Congress extracted monies for funding other unrelated activities. With the inception of maintenance fees, which administration of which is virtually nil, even more monies were regularly added to the USPTO coffers. Obviously, somewhere along the way people seemed to overlook the fact that the granting of patents is meant to reflect a quid pro quo. An inventor must disclose as a precondition of receiving a grant. PAYG and maintenance fees basically stood quid pro quo on its head such that the system as presently constituted in quid no quo.

Another point that I believe bears mentioning. There seems to be a belief by some not fully immersed in the system that somehow the issuance of a patent means that “monopoly rents” are almost a given. I am not an economist, but I have been around business and the law long enough to know it is rare, if ever, that a patentee is placed in a position where “monopoly rents” are readily available and realized by a patentee. In every instance a product embodying something covered by a patent is in competition with a wide variety of similar products. One can argue that pharmaceuticals are an exception, but even in this situation there are typically many other formulations of virtually identical efficacy. Sometimes a “blockbuster” does rise to the surface, but this is infrequent.

newson February 9, 2009 at 8:48 pm

to mls:
are you seriously trying to argue that since uspo is a profit centre for the government, there is no cost to society?

“monopoly rents” are the result of ip, what else could they be? the whole idea of ip is to secure exclusive title to the use of an idea. nobody denies that there isn’t competition among patented goods, just that the costs are higher than they otherwise would be.

newson February 9, 2009 at 8:51 pm

le holder says:
“Because IP laws are such an infinitesimally small portion of government, I suggest that if IP laws were completely abolished not one penny would be saved in taxes.”

you can do better than this. please explain how you arrived at this figure.

Lonnie E. Holder February 10, 2009 at 7:36 am

newson:

Read MLS’s post. It is quite accurate. I have seen studies that (depending on which one you believe) state that somewhere between 90 to 98% of all patents are either not used in a product (any product, anywhere) during the effective life of the patent (though they may well be used after the patent has expired), or they do not pay back the cost of filing for the patent.

Now, even if 90% of all patents do not earn back the money paid in filing fees, that means that the remaining 10% have the “potential” for what many people call “monopoly rents.” However, as MLS has pointed out, there are many industries where monopoly rents are not available because of competition. I have provided numerous examples of these, so repeating them again is pointless.

I believe it was Boldrin & Levine who estimated that the economic affect of patents in the U.S. was approximately $12 billion per year. Assume that is true (I think that is high, but let’s run with it).

If that is true, then compare that to the GDP of $14,280.7 billion. That means the economic impact of patents on GDP would be 0.08%, which I have also said many times before. That equates to an effect of about 8 cents on every 100 dollars. Compare that to sales taxes that run up to 800 cents per hundred dollars, or more.

Now, with respect to the government, as MLS pointed out, patents are paid for by applicants. The USPTO has generated profits to the government of more than $200 million per year. Even if you throw in the relatively small cost of the 12 member CAFC, and the costs of dealing with patent related lawsuits in federal court, which make up about 1% of all federal court cases, the U.S. government still makes money on patents rather than spending money.

As I said, infinitesimal, no matter how you look at it.

And now, Boldrin and Levine has articles on their web site Against Monopoly, objective articles, I might add, that point out the benefits of patents and optimal lengths for patents. How interesting.

newson February 10, 2009 at 5:56 pm

to le holder:
cost/benefit analysis of ip is purely speculative. if i accept your figures for the actual administration of the ip bureaucracy, it still gives me no idea about what i’m missing in opportunity costs by not legislating for ip. entire industries would have grown up along different lines.

nobody, b&l included, can quantify what would have been…

Lonnie E. Holder February 10, 2009 at 8:43 pm

newson:

You are correct. Neither do we know which industries would never have existed without IP. I do have a couple of recent papers that are interesting, though.

http://www.comp.nus.edu.sg/~ipng/research/patent_grwth.pdf
http://www.comp.nus.edu.sg/~ipng/research/patent_figtab.pdf

http://www.dklevine.com/papers/scalerev10.pdf

Lonnie E. Holder February 10, 2009 at 8:57 pm

newson:

You are correct. Neither do we know which industries would never have existed without IP. I do have a couple of recent papers that are interesting, though.

http://www.comp.nus.edu.sg/~ipng/research/patent_grwth.pdf
http://www.comp.nus.edu.sg/~ipng/research/patent_figtab.pdf

http://www.dklevine.com/papers/scalerev10.pdf

MLS February 11, 2009 at 12:20 pm

To Newson:

to mls:
are you seriously trying to argue that since uspo is a profit centre for the government, there is no cost to society?.

“monopoly rents” are the result of ip, what else could they be? the whole idea of ip is to secure exclusive title to the use of an idea. nobody denies that there isn’t competition among patented goods, just that the costs are higher than they otherwise would be.

I scarcely know where to begin, so I will note just a few points.

You talked about the cost of the patent system to taxpayers, and all I did was note to Mr. Holder about the PAYG structure of the USPTO. I made no mention as you did above about “society”.

The whole concept of “monopoly rents” being caused by the existence of IP is simplistic and ignores what really hapens in the marketplace. A patentee can only realize these so-called :monopoly rents” if the patent is so generic that there are for all practical purposes no other alternatives for what the patent covers. In 30 years of practice I have never seen a situation in the marketplace that even comes close. Patentees who sell products/services that embody what their patent covers are not immune to supply/demand pressures. They are still governed by “what the market will bear”.

The statement that a patent somehow provides an exclusive right to an idea is wrong, manifesting a lack of understanding of the patent system. A mere “idea” is not even eligible for protection under our patent laws. The same is equally true concerning copyright.

What is protectable if a firm, concrete and definite application of the idea into something that satisfies the tests for eligible subject matter, novelty, non-obviousness, and a complete description of what the application (i.e., invention) entails.

BTW, I am not one who believes our economic future is dependent upon patents and copyrights. But I do know this. In the absence of such a system (which to varying degrees does give some measure of predictability to our system of commerce) other legal mechanisms would invariably spring up that would make the “IP is bad” crowd long for the good old days when patents and copyrights were a part of our law. My advice is to be careful what you wish for because you may very well get it and be none too pleased.

Deefburger March 12, 2009 at 10:10 am

I would like to add a little history to this about Edison and Tesla. Edison owned many many patents. Almost all of them in his name, but without the names of the engineers he employed to invent them for him. His company was one of the first Patent Houses. His employees never saw a dime beyond their paychecks.

Tesla had many patents as well, but it was Westinghouse who owned Tesla and the rights to produce. Tesla died a pauper.

Big money wins in the patent world, every time, no matter who the inventor is.

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