Jonathan B. Wight

Many economists have an interesting schizophrenia when it comes to patents. Normally, the moral imperative in neoclassical economics is to maximize the economic surplus. But seemingly out of nowhere, most textbooks are perfectly willing to entertain the idea that another kind of moral imperative could suddenly trump efficiency—and that is long run dynamic growth and innovation. Allowing patent monopolies will hurt output and the economic surplus but—the traditional story goes—will create incentives for risk-taking and discovery. Schumpeter's "creative destruction" is widely touted.

But what if the desired dynamism actually results from more competition and less patent monopoly? This is the argument of Boldrin and Levine, writing in the Journal of Economic Perspectives (27/1)(Winter 2013): 3-22. They argue against patents on empirical and theoretical grounds:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the "patent puzzle": in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.

Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects. More generally, the initial eruption of innovations leading to the creation of a new industry—from chemicals to cars, from radio and television to personal computers and investment banking—is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment. It is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents, usually because their internal growth potential diminishes and they become more concentrated. These observations, supported by a steadily increasing body of evidence, are consistent with theories of innovation emphasizing competition and first-mover advantage as the main drivers of innovation, and they directly contradict "Schumpeterian" theories postulating that government-granted monopolies are crucial to provide incentives for innovation.

A world without patents seems unimaginable, just as a world of floating exchange rates and an all-volunteer army seemed unthinkable in the mid-1960s when Milton Friedman proposed these. Yet experience has shown that sometimes economists have good ideas for transforming public policy.