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Stiglitz in IP take 2 : Give prizes not patents

by Laurent GUERBY Wed Sep 20th, 2006 at 05:07:49 PM EST

From Marginal Revolution, Joseph Stiglitz writes on New Scientist  (article in PDF):

Innovation is at the heart of the success of a modern economy. the question is how best to promote it. the developed world has carefully crafted laws which give innovators an exclusive right to their innovations and the profits that flow from them. But at what price? there is a growing sentiment that something is wrong with the system governing intellectual property (IP). the fear is that a focus on profits for rich corporations amounts to a death sentence for the very poor in the developing world. So are there better ways of promoting innovation? Intellectual property is different from other property rights, which are designed to promote the efficient use of economic resources. Patents give the grantee exclusive rights to an innovation - a monopoly - and the profits this generates provide an incentive to innovate. Recent years have seen a strengthening of IP rights: for instance, the scope of what can be patented has been expanded, and developing countries have been forced to enact and enforce IP laws. the changes have been promoted especially by the pharmaceutical and entertainment industries, and by some in the software industry who argue that the changes will enhance innovation. [...]

[...] Patents are not the only way of stimulating innovation. a prize fund for medical research would be one alternative. Paid for by industrialised nations, it would provide large prizes for cures and vaccines for diseases such as aIDS and malaria that affect hundreds of millions of people. Me-too drugs that do no better than existing ones would get a small prize at best. the medicines could then be provided at cost. In any system, someone has to pay for research. In the current system, those unfortunate enough to have the disease are forced to pay the price, whether they are rich or poor. and that means the very poor in the developing world are condemned to death. the alternative of awarding prizes would be more efficient and more equitable. It would provide strong incentives for research but without the inefficiencies associated with monopolisation. this is not a new idea - in the UK for instance, the Royal Society of arts has long advocated the use of prizes. But it is, perhaps, an idea whose time has come.

My (usual) comment on Marginal Revolution:

Henry, do you need government sponsored monopolies to encourage entrepreneurs to make and sell, say, pizzas? Oranges? Bottled water?

So, no once the formula is there, you don't need government incentive to mass-produce and sell drugs, as all products (on markets where the government does not screw the free markets with government sponsored monopolies), entrepreneur will compete to provide them at the lowest possible cost meeting regulations, and take appropriate really free market leveled margins. As Mike said.

Now the question is how to get the formulaes in the first place, and prizes might well be vastly more economically efficient than cumbersome and corruption generating "intellectual property".

To quote someone who cannot be accused of favoring non free markets:

Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...]

The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.

Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period.

The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek

Another horror story from Against Monopoly:

oe Nocera wrote a fascinating story about a nasty patent suit between a patent-trolling company, whose board is chaired by none other than Paul Allen, and audible.com. The story begins:

Nocera, Joe. 2006. "Tired of Trolls, a Feisty Chief Fights Back." New York Times (16 September). "Patent disputes have become part of the dark underbelly of American business. So-called patent trolls acquire patents, often from bankrupt companies -- and often overly broad patents that should never have been issued by the United States Patent and Trademark Office in the first place. Instead of using them to build a commercial product, they extract licensing fees from companies that are making and selling real products. As The New Jersey Law Journal put it not long ago, "They exist solely to exact a tax"." "The deck is stacked against target companies, even when their product is not infringing. Patent litigation is expensive, and the judicial system tends to be sympathetic to the patent holder. So companies usually come to the obvious conclusion: it makes more sense to pay than to fight. For its part, the patent troll often prices the licensing fee below the cost of litigation, to encourage such behavior." Abuible refuses to settle, spends a million dollars rather than pay the demanded $300,000, only to find out the troll company does not even have legitimate ownership of the patent. "After a year of legal wrangling, Digeo dropped its price. A clearly frustrated Mr. Blaisdell wrote an astonishing e-mail message in May 2006 to Audible's internal lawyers, saying he was "perplexed as to why Audible has not taken Digeo up on its offer to settle for $300K." After all, he pointed out, that was far less than the "high legal fees" Audible was paying. He added, "Surely you understand that the prospect of convincing a Jury that Audible doesn't infringe or that the Patent is invalid is an expensive one." Digeo may or may not be a patent troll, but rarely has the economics of patent trolling been so baldly stated." "As it turns out, Digeo did not have the complete ownership of the patent that it thought it had. Documents that had been turned over to Digeo when it bought the patent showed that Edward Chang, one of the four co-inventors, had died, and that another -- his brother -- had assigned the rights to the patent to the company that later sold the `823 to Digeo." "Edward Chang, however, was very much alive, and his brother had never assigned the rights to anyone. The documents had been forged -- though it's not yet known by whom. The forgery was discovered by Mr. Kelber, the Audible lawyer. Audible then went to Mr. Chang and got him to sell it a license for $70,000. Last month, when this new evidence was presented, a judge ruled that Digeo was entitled to no monetary damages from Audible.

by Laurent GUERBY on Wed Sep 20th, 2006 at 06:53:14 PM EST
There are some professional arguments against claiming that intellectual property is necessary as an incentive for innovations, and Michele Boldrin is a major force. Below is an abstract from a paper of his:

In the modern theory of growth, monopoly plays a crucial role both as a cause and an effect of innovation. Innovative firms, it is argued, would have insufficient incentive to innovate should the prospect of monopoly power not be present. This theme of monopoly runs throughout the theory of growth, international trade, and industrial organization. We argue that monopoly is neither needed for, nor a necessary consequence of innovation. In particular, intellectual property is not necessary for, and may hurt more than help, innovation and growth. We argue that, as a practical matter, it is more likely to hurt.

He also has chapters from a future (and much less technical) book on his page, do have a look if you are interested in the issue.

by Sargon on Thu Sep 21st, 2006 at 09:58:26 AM EST
Sargon, thanks for the links.

It's quite hard to find evidence that the current system is doing any good (except to lawyers bank account), but there's a lot of inertia since the damage to the general public is not perceived as big enough yet (because only poor people die because of high drug prices, or because everyone now thinks that software and operating systems can only be full of bugs and programs not working together). Fighting inertia requires lots of work especially since the benefiting crooks very close to power (lawyers).

by Laurent GUERBY on Thu Sep 21st, 2006 at 12:05:34 PM EST
[ Parent ]
It's Boldrin and David K. Levine, actually.
by Sargon on Thu Sep 21st, 2006 at 12:31:49 PM EST
[ Parent ]
I really want to agree that IP is not necessary for innovation.  And I really want to believe that handing out prizes will spur the level of innovation, research and development as IP.

I love Hayek's point you quote:

I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it

But it does not cost (hundreds of?) millions of dollars to write Gravity's Rainbow.

Do you think, for example, that without the existence of IP/patents, all the medical drugs, machines, technology in general which were created in the last 100 years would in fact have been developed?  Would they have if some kind of "prize system" had been in place rather than the actual IP system?  (I am not asking skeptically.  I really don't have any idea myself.)

Truth unfolds in time through a communal process.

by marco on Thu Sep 21st, 2006 at 09:26:01 PM EST
An interesting data point is looking at what Bill Gates is doing in the drug research area. In short, he tries to have people doing research communicate openly their ideas and data sets. Why? Because in the patent-screwed world they don't and he thinks it costs a lot.

Why do we spend millions in drug research? May be it's just that the system is grossly inefficient. I've heard than R&D costs is 25% lawyers. And R&D costs are way smaller than marketing advertizing in the drug market.

An interesting point by Healthcare Economist:

The so-called genius awards (actually called the MacArthur Foundation fellows) are given to 25 individuals based on "their creativity, originality, and potential to be significant contributors in their fields."  Recipients receive $500,000 over five years with no strings attached.  One of the recipients which interests this blog is Victoria Hale (bio).  She is a pharmaceutical entrepreneur who started a non-profit drug company to treat third world diseases.  NPR's Marketplace ran an interview with Ms. Hale yesterday and below is an excerpt: [...]

I honnestly have very little doubt that entrepreneur and non-profit, plus government and prizes are vastly more efficient than the current system in the drug development area.

If you look at technology history, and personality of people doing the real work (see wikipedia and free software for recent examples, but they are others), I really doubt any single invention is due to IP, and I think we're missing many inventions (especially in software, some areas are just gigantic minefields even free software hero don't want to touch...).

by Laurent GUERBY on Fri Sep 22nd, 2006 at 05:21:23 AM EST
[ Parent ]
An interesting data point is looking at what Bill Gates is doing in the drug research area. In short, he tries to have people doing research communicate openly their ideas and data sets. Why? Because in the patent-screwed world they don't and he thinks it costs a lot.
Why doesn't Bill Gates apply that reasoning to software? Sheesh.

Those whom the Gods wish to destroy They first make mad. — Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 22nd, 2006 at 05:39:44 AM EST
[ Parent ]
Here is one of Bill Gates comment on patents (1991, source: wikipedia):

If people had understood how patents would be granted when most of today's ideas were invented and had taken out patents, the industry would be at a complete standstill today...The solution is patenting as much as we can. A future startup with no patents of its own will be forced to pay whatever price the giants choose to impose. That price might be high. Established companies have an interest in excluding future competitors.

See the 2005 version of the comment :).

by Laurent GUERBY on Fri Sep 22nd, 2006 at 07:33:44 AM EST
[ Parent ]
So the solution t whatever problem Bill Gates thinks he has is to patent as much as he can, which in his own words will "exclude future competitors" and put the industry "at a complete standstill".

Good thinking.

Those whom the Gods wish to destroy They first make mad. — Euripides

by Migeru (migeru at eurotrib dot com) on Fri Sep 22nd, 2006 at 07:36:18 AM EST
[ Parent ]
Hence the 2005 version:

...There are some new modern-day sort of communists who want to get rid of the incentive for musicians and moviemakers and software makers under various guises. They don't think that those incentives should exist... I'd be the first to say that the patent system can always be tuned...the United States has led...because we've had the best intellectual-property system.
by Laurent GUERBY on Fri Sep 22nd, 2006 at 07:45:47 AM EST
[ Parent ]
Large companies are positively antisocial. Once they reach a certain size they change the way they operate and become focused on stifling competition more than on innovating.

Those whom the Gods wish to destroy They first make mad. — Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 22nd, 2006 at 07:50:21 AM EST
[ Parent ]
Exactly, and those huge R&D numbers from big companies are just fake, a point I was making above.

There's a reason why european SME organisation CEA-PME is against software patents:

CEAPME (Confederation Europeenne des Associations des Petites et Moyennes Entreprises, European Union of Associations of Small and Medium Enterprises) assembles SME associations from EU member states, totalling a number of 500,000 SME members on its own and 1,600,000 together with two regular partner organisations. FFII is also an associate member of CEAPME. [...]

Ignored by the commission of course. European SME are not the general interest, USA mega-corpos are!

by Laurent GUERBY on Fri Sep 22nd, 2006 at 08:11:38 AM EST
[ Parent ]
Bell Labs was extremely unusual in the amount of in-house research it funded.

Those whom the Gods wish to destroy They first make mad. — Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 22nd, 2006 at 08:16:17 AM EST
[ Parent ]
My previous job was at a small software company selling software for biotech labs. Among other things, for tracing of experiments, QA, and establishing proven dates for IP protection.
One important part of the budget for big-business drug development, is the delirial risk-aversion of occidental societies.
Drugs are over-tested, requirements for the ratio of effectiveness to adverse effects are crazy, and the big pharma takes accordingly big measures to guarantee they will have no legal liabilities for new products (see the Vioxx law suits). Aspirin couldn't be released to the market if it was invented today.
The former (and much contested) manager of the Pasteur Institute in Paris, Philippe Kourilsky, also argued that our "ethic" standards were also hindering developed countries: we stopped the development of cost-effective drugs because they had adverse effects that the florida widows would deem unacceptable, when these effects wouldn't be noticed by a malaria-infected kid in Africa.
So basically, we have become a society of old coward farts. May be a great civilization collapse would do us good ...

by Pierre on Fri Sep 22nd, 2006 at 06:02:46 AM EST
[ Parent ]
Yes, I agree we're too comfortable in our opulence.

Those whom the Gods wish to destroy They first make mad. — Euripides
by Migeru (migeru at eurotrib dot com) on Fri Sep 22nd, 2006 at 06:06:02 AM EST
[ Parent ]
life-style drugs for the rich vs life-saving drugs for the poor indeed.

Remember the big pharmas sued the states that tried to copy life-saving drugs and are still doing so.

by Laurent GUERBY on Fri Sep 22nd, 2006 at 07:44:41 AM EST
[ Parent ]
Who pays the bill for drug clinical tests? Are drug companies really paying 100% of the cost? Or is it us through insurance and government support?

Also, aren't clinical tests indeed much more expensive for lifestyle drugs involving 5% better chance of this or that than life-saving drugs were you die if you don't take it anyway?

And I don't buy the aspirin argument, there was a somewhat recent large trial of people taking aspirin all day long, so obviously it would have been accepted today.

For Vioxx, it is established that the company deliberately withdrew critical data from the regulator, this is an horrible crime, nothing to do with the discussion here.

Last point, big pharmas will always prefer drugs you have to take until the end of your life rather than drugs that cure you. Economics 101, but often forgotten, another ill-effect of the current screwed-up IP system.

by Laurent GUERBY on Fri Sep 22nd, 2006 at 07:43:03 AM EST
[ Parent ]
The bill is really for the big pharma, at least directly. Most of the "research" budget is actually big IT and staff spending to monitor the large scale trials. There are special contractors called CRO's "contract research organizations" who make a living on outsourcing this work.
Of course, since it's labeled "research", it can be partly funded by govn'mt funds for supporting research. In the EC, by Esprit/PCRD programs.

And I maintain that the FDA or EMEA criteria for safety are the same whether the drug is life saving or not. It is absolutely Kafkaian. For some "orphan" disease, they require proving the effect with double-blind trials involving more patients than you can enroll in a country the size of France, simply because there are too few people affected (they are now thinking about changing the workflow for those diseases...). And for drugs that only matter to the developing countries, they require proving that there are no interactions with prescription drugs for rich-world-only diseases.

The major preoccupation of the legislators and managers of approval agencies, is their own judicial security. So they build rules that nothing new can pass. They don't care for stuff that was approved before they took office: studies regarding aspirin are usually made by universities (big pharma doesn't pay to study public domain stuff) and since the universities have no hard cash, they make so-called meta-studies. By aggregating several other published studies primarily concerning other issues, but where patients were asked "do you regularly take aspirin", they can make findings by correlation which have a decent statistical meaning.

And if you look up most medical advisory text today, you really get a feeling that most physicians want to phase out aspirin because of oh-so-bad hemorraegic effects and stomach ulcers and-so-on...


by Pierre on Fri Sep 22nd, 2006 at 10:21:34 AM EST
[ Parent ]

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