AMERICA is still in denial, but among economists and wonks I think the hard truth is settling in: we're not as rich as we thought we were and our prospects for future high growth rates aren't looking so great. America's last best hope for breaking free from what Tyler Cowen has called "the great stagnation" is the discovery of new "disruptive" technologies that would transform the possibilities of economic production in the way the fossil-fuel-powered engine did. As it stands, growth, such as it is, depends largely on many thousands of small innovations increasing efficiency incrementally along many thousands of margins. Innovation and invention is the key to continuing gains in prosperity.

Zero-sum "win the future" rhetoric notwithstanding, it doesn't much matter whether the advances in new technology occur in China, India or America. Nevertheless, it remains that America is the world's leader in technical invention, and continues to attract many of the world's most inventive minds. That's why it is so important that America remain especially conducive to innovation. And that's why America's intellectual-property system is a travesty which threatens the wealth and welfare of the whole world. It may seem a recondite subject, but the stakes couldn't be higher.

This recent episode of Planet Money, "When Patents Attack", is an informative and entertaining primer on the way America's patent system squelches competition, slows innovation, and enables egregious predation through the legal system. Please listen to this. And then tell me that Nathan Myhrvold of Intellectual Ventures is not our age's authentic villainous robber baron, making a fortune gaming America's dysfunctional patent-law system to shake down would-be innovators.

Planet Money's programme explains everything better than I can, but the thrust of it is that it is next to impossible to offer a new technology or software-driven service without getting sued for patent infringement. For example, Spotify, an innovative, highly-praised music streaming and subscription service, became available in America just a couple weeks ago. It took until last week for this to go down:

PacketVideo, a software company that enables wireless streaming of music and videos on mobile devices, filed the suit against Spotify on Wednesday, claiming that the U.K.-based company violated a patent for "distribution of music in digital form." The plaintiff cited a violation of U.S. patent 5,636,276 and says "Spotify USA has offered for sale, sold, and imported products and/or services configured to infringe the '276 patent, and instructed and encouraged others to use the '276 patent in an infringing manner." "PacketVideo has a strong intellectual property portfolio, and will take any necessary action needed to protect its intellectual property and prevent the misuse of its patents," says Joel Espelien, general counsel and vice president of strategic relationships.

This is apparently a patent on streaming music over the internet. Naturally, you are familiar with PacketVideo's popular music streaming service. Oh, you're not? I guess that's because they don't offer one. So, Spotify is trying to make money offering a service that will make consumers happy. (I'm using it right now. I think it's terrific.) PacketVideo is trying to make money doing what? Shaking down Spotify?

Here's where Mr Myhrvold's Intellectual Ventures comes in. Intellectual Ventures owns a huge portfolio of patents. Quite possibly they also have some sort of patent that covers streaming music over the internet. Intellectual Ventures makes money through a sort of protection racket that helps Spotify defend themselves against companies like PacketVideo. For a considerable fee, a company can access Intellectual Venture's storehouse of patents and use them defensively against companies claiming patent infringement. Julian Sanchez lucidly explains how the very existence of "defensive patents", and of companies in the business of selling them, is proof of a badly broken intellectual property system:

[T]hink about how defensive patents work. Companies aren't buying them—or buying into the services of companies like Intellectual Ventures—because they provide otherwise unavailable technical insights. The point, rather, is to acquire (or have access to) a bundle of patents that any potential litigant who sues you is likely to be “infringing” in their own products. ... This only works, however, if other companies are almost certain to have independently come up with the same idea. A patent that is truly so original that somebody else wouldn't arrive at the same solution by applying normal engineering skill is useless as a defensive patent. ... [E]very patent granted for an idea that any number of suitably skilled engineers could have (and would have, and did) come up with is a patent that probably shouldn't be granted—a pure deadweight loss that's actually compounded by the squandering of resources on the “arms race,” with no compensating dynamic gain. Actually, there's probably a dynamic loss: You end up creating a huge incentive for smart and skilled people to spend their time and energy not coming up with a brilliant idea that nobody else would have, but instead trying to be the first to put on paper ideas that are obvious (to a properly trained and up-to-date person) but haven't been locked down yet—the solution, again, that almost any professional would have come up with once they were actually trying to implement the relevant technology. A sector where investment in defensive patents is so massive, then, is a sector where—even if some of them do genuinely add value—patents are probably doing more harm than good on net.

A new paper on "The Myth of the Sole Inventor" by Mark Lemley, a professor of law at Stanford, reinforces Mr Sanchez's point.

[S]urveys of hundreds of significant new technologies show that almost all of them are invented simultaneously or nearly simultaneously by two or more teams working independently of each other. Invention appears in significant part to be a social, not an individual, phenomenon. Inventors build on the work of those who came before, and new ideas are often "in the air," or result from changes in market demand or the availability of new or cheaper starting materials. ... The result is a real problem for classic theories of patent law. If we are supposed to be encouraging only inventions that others in the field couldn't have made, we should be paying a lot more attention than we currently do to simultaneous invention. We should be issuing very few patents – surely not the 200,000 per year we do today. And we should be denying patents on the vast majority of the most important inventions, since most seem to involve near-simultaneous invention.

At a time when our future affluence depends so heavily on innovation, we have drifted toward a patent regime that not only fails to fulfil its justifying function, to incentivise innovation, but actively impedes innovation. We rarely directly confront the effects of this immense waste of resources and brainpower and the attendant retardation of the pace of discovery, but it affect us all the same. It makes us all poorer and helps keep us stuck in the great stagnation.

(Photo credit: AFP)