The patent system (I concentrate on patents) is supposed to encourage innovation, the foundation of economic progress. It does this by giving patent recipients exclusive control for a specified period of time over use of their patented goods, machinery, processes, or services. It has long been recognized that patents impose costs on society since patents keep out competition, so that the monopoly power of patent holders enables them to raise prices and lower outputs. However, until recent years many other costs of the patent system received little attention, including paradoxically that this system might in fact discourage innovations.

Posner has a very good discussion of many costs of a patent system. These include not only the monopoly power given to patent recipients, but also time-consuming and expensive patent litigation because of overlapping patents, patent trolling to gain control of large numbers of patents not for use but to force compensation through litigation, and the ability to patent minor improvements over existing technologies. One additional important cost is that companies in many developing countries, in particular China, do not worry about patent infringement, and often produce much cheaper copies that undercut patented products. These companies have an advantage over companies in developed countries that refrain from producing patented products because they fear punishment from the courts for infringing patent rights.

Patent infringement lawsuits, copying by companies in developing countries, and many other obstacles to profiting from innovations under the modern patent system not only discourage certain types of patent applications, but may also reduce the incentive to innovate itself. Why apply for a patent if the information in the application makes it easier to produce copies? Moreover, the potential profit from an innovation might be more than dissipated through lengthy patent litigation that involves also the risk of large fines- as in the recently imposed fine on Samsung of over $1 billion for allegedly copying software patented by Apple.

The various harmful effects of the patent and copyright systems encouraged Arnold Plant, an English economist, to publish over 75 years ago two influential articles on why England and other countries would be better off without patents and copyrights. Among other things, he argued that the temporary monopoly power given to patent holders often led to inefficiently high prices and reduced output of patented goods, that many persons would continue to invent even if they could not patent their inventions, and that patents distort innovations in favor of goods and processes that can be patented and away from innovations that cannot be patented. His favorite example of the latter is basic research in the sciences that produced the theory of relativity, the theory of evolution, and in more modern times our understanding of DNA and genes. He believed that the patent system induced some creative scientists to work in areas that could be patented rather than on basic scientific research that could not be patented.

Although ending the patent system is a clean solution to all the problems induced by modern patenting, it clearly is not desirable given the importance of industries like the pharmaceutical industry. Since this industry spends on average hundreds of millions of dollars bringing to market a successful drug, pharmaceutical companies would not invest such large sums without the protection of patents (or without other benefits). Probably the best solution would be to maintain the patent system on drugs and a few other products that are expensive to innovate and cheap to copy, and eliminate patents on everything else. In particular, this means eliminating patents in the software industry, the source of much of the patent litigation and patent trolling.

I admit it is not clear where to draw the line between what should and should not be patentable. However, one can start by eliminating the ability to patent software, and go on from there to prune the number and type of inventions and innovations that are eligible for patent protection. Plant was not right about the desirability of eliminating the patent system, but he erred in the right direction. We should try to move much closer to where he wanted to be, and away from the present system.