The Economist is at it again (when it comes to patents)

Last August, The Economist attracted wide-spread attention with its cover story, "Set Innovation Free", here and here, in which it aggressively attacked the patent system as too often inimical to innovation. This Kat took issue with the overall thrust of the arguments being made. In this Kat’s view, The Economist had cobbled together bits and pieces of economic history and empirical analysis to promote a broad patent-hostile narrative, in line with the fashion among some IP thought leaders.

The Economist is at it again. This time the issue is not innovation but the decline in market competiveness and the increase in industry concentration, both as embodied in the stickiness of oversized corporate profits. Companies are making too much money and displaying too little competitive instincts, preferring to consolidate their positions, to the detriment of the economy writ-large.

Kat readers wishing to consider these the arguments in full are invited to read the two companion pieces(“The problem with profits” and “Too much of a good thing”). In light of last August’s attack on patents, what is of interest to this Kat is the attention given to intellectual property, and particular to patents, as contributing to the twin problems of lack of market competitiveness and industrial over-concentration.

Let’s allow The Economist to speak for itself. This Kat has identified in the two companion pieces where patents/IP are mentioned. We can arrange these quotations into three principal categories--

I. Companies are gaming the patent system for their own business ends rather than using it to support genuine innovation

“A mastery of patent rules has become essential in health care and technology, America’s two most profitable industries.”

“The rising importance of intangible assets, particularly patents, has meant that an ability to manage industry regulators and the challenges of litigation is more valuable than ever.”

II. Regulation of the abusive aspects of the patent system is inadequate

“It [FTC] has … fought ‘pay-for-delay’ deals in which pharmaceutical firms try to stop generic competitors from launching rival products when patents expire.”

“Lots of important subjects are beyond their [DOJ and FTC] purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important."

III. The patent system supports incumbency rather than innovation and competition

“But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries.”

“The industry [health care] is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions.”

“It [an alternative approach] would examine a loosening of the rules that give too much protection to some intellectual property rights.”

These IP-related claims are short on empirical support and long on rhetorical broad-strokes. In an age where sound-bites predominate, that is perhaps not surprising. Against this background, permit this Kat to make several observations:

1. The Economist seeks to indict the patent system both coming and going. On the one hand, the patent system is too backward-looking because it allows patent owners [and, Merpel adds, according to The Economist,copyright owners as well] “to milk” their “old discoveries.” On the other hand, the "patent rules … allow firms temporary monopolies on innovative new drugs and inventions.” It would seem that the patent system cannot win. If one’s invention is successful and meets the test of commercial time, then it confers the inventor with supra-competitive profits over the life of the patent. But current innovation is also distorted by the patent system, because the advances in innovation are due to a "temporary monopoly". The upshot is that patent protection is problematic, whatever point of time we take.

2. In fact, we may not have enough patent protection in what The Economist calls “technology”, where market share (think Alphabet/Google) is being driven principally by network effects and accumulation of data (as The Economist itself recognizes). But perhaps the market strength of companies in these industries is because patents are simply of lesser importance, with the result that the dynamic process of invention and design around is not sufficiently present. Maybe we need more patent activity, not less.

3. The patent narrative needs to be more nuanced. Too often, the narrative takes on a Manichean quality, portrayed as the forces of patent light in battle with the forces of patent darkness. How the patent system impacts innovation, market competitiveness and industrial concentration is far from straightforward and it does not lend itself to simple binary conclusions. Because of the complexity and nuances of these relationships, more humility in discussing these issues is warranted, even at the cost of less rhetorical certitude.