Evaluating The Benefits And Costs Of Patents

The electric car company Tesla recently announced it was putting its patents in the public domain. Our Planet Money team looks at what would happen if we got rid of patents all together.

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The electric car company Tesla recently took the unusual step of effectively giving up all its patents. That means any competitor is now free to take the company's ideas and run with them. David Kestenbaum with our Planet Money team looked at why Tesla did it and what the world might be like if we got rid of patents altogether.

DAVID KESTENBAUM, BYLINE: Back in 2007, I road in an early Tesla prototype with the guy who is now the company's CEO, Elon Musk.

(SOUNDBITE OF ARCHIVED BROADCAST)

ELON MUSK: Go for a little ride.

KESTENBAUM: Oh, the cars on?

MUSK: Yeah.

KESTENBAUM: It's not so good for radio. There's no vroom, vroom.

MUSK: Well, it's great if we want to talk. It's as quiet as a mouse.

KESTENBAUM: Quiet an fast - zero to 60 in under four seconds.

Today, seven years later, it is still rare to see an electric car on the road. When Tesla announced, last month, that it was putting its patents in the public domain, Elon Musk said that was one of the reasons. Patents can slow down innovation. David Levine, an economist at Washington University in St. Louis, agrees. He says if Elon Musk wants there to be electric cars in every parking lot, he needs other companies to succeed.

DAVID LEVINE: They're not going to make a lot of money if the market doesn't take of. It's not going to take off if they go around trying to enforce their patents.

KESTENBAUM: Levine and a colleague Michele Boldrin have actually been arguing for years that the whole world would be better off if we just got rid of patents altogether. If you invent something, anyone else should be able to copy it. I pointed out that just about every developed country seems to have a patent system. Michele shrugged.

MICHELE BOLDRIN: So what? Every developed country in the world 20 years ago had tariffs on trade out the wazoo. I mean, I can go on for a while - the list of stupid things every country in the world has that damage economic development.

KESTENBAUM: Patents clearly have a benefit and a cost. The benefit is that patents create incentives for people to come up with new ideas. The cost is that patents grant someone a monopoly over an invention, usually for 20 years. For 20 years, no one else can use the idea in a patent without the patent holder's permission. So the question is which is bigger, the benefit or the cost? David and Michele say the costs greatly outweigh the benefits. I told them about a guy I'd met named Gene Gagliardi who owns patent number 5,266,064, method of making a food product from the thigh of a bird, which you probably know better as popcorn chicken. He licensed it to KFC. Michele's response was, you really going to bring up the inventor in his garage?

BOLDRIN: Yeah, yeah - and I understand that this is so marginal and so secondary in the economic growth profit that it's not even worth considering.

KESTENBAUM: There are plenty of ways for inventors to make money with patents, he says. Gagliardi could go work for KFC. He'd be the meat research and development department. A trickier question, though, is that what would happen to the drug industry in a world without patents. Why would a pharmaceutical company invest tens of millions of dollars to develop a new cancer drug if competitors could just come along and copy it? David Levine agrees this is probably the biggest problem with the idea of getting rid of patents. But he has a clever idea to make it work. The government, he says, could fund most of the new research into possible drugs, and pharmaceutical companies could bid to test the drugs and get a share of the profits.

LEVINE: Here's the thing. The government is already in this business, just in a really, really crude and stupid kind of way.

KESTENBAUM: When David Levine and Michele Boldrin started making the kill Patton's argument fifteen years ago, people did not really take them seriously. I asked what reaction they get now.

BOLDRIN: Our reactions have been improving - about a few months ago, I was sitting at dinner with a famous economist - maybe I shouldn't say the name but he's got a Nobel Prize - back when we came out, he was a very strong opposer to our view. And he was - it was nice to have him come over. He says, you know, I guess you guys were right on that thing. You're right. And I said, well I wish you had said it 15 years ago. We would've had an easier life, but, you know, thank you.

KESTENBAUM: David and Michele say a start would be to just shorten the life of patents. Go from 20 years to 18 or 16, and see what happens. If people are still inventing, still innovating, keep going - 10-year patents, four years - all the way down to zero. David Kestenbaum, NPR News.

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