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Striking a balance between intellectual property and freedom to innovate

The economist Arthur Laffer is reputed to have drawn his famous
curve—showing that beyond a certain point higher taxes generate
lower revenue—on a paper napkin at a dinner with Dick Cheney
and Donald Rumsfeld in the Washington Hotel in

Another economist, Alex Tabarrok of George Mason University,
last year drew a similar curve on a virtual napkin to
argue that, beyond a certain point, greater protection for
intellectual property causes less innovation. He thinks that U.S.
patent law is well beyond that optimal point.

Last week the Supreme Court came out against the patenting of
genes, on the grounds that they are discoveries, not inventions,
though it did allow that edited copies of the DNA of a breast
cancer gene should be seen as invented diagnostic tools. Dr.
Tabarrok thinks that decision and other recent rulings are nudging
patent law back in the right direction after a protectionist drift
in the 1980s and ’90s.

The argument for patents is that, without the monopoly they
grant, inventors will not make discoveries, and if they do, they
won’t share them. So inventors get 20 years of protection against
imitators. The counterargument is that patents are often used
defensively to deter rival innovators and thus to discourage
innovation. America’s Semiconductor Chip Protection Act of 1984
resulted in more patenting but less innovation as firms tried to
build up defensive “war chests” of patents to use in disputes with
each other.

Many firms use patents as barriers to entry, suing upstart
innovators who trespass on their intellectual property even en
route to some other goal. In the years before World War I, aircraft
makers tied each other up in patent lawsuits and slowed down
innovation until the government stepped in. Much the same has
happened with smartphones and biotechnology today. New entrants
have to fight their way through “patent thickets” if they are to
build on existing technologies to make new ones.

In his 2010 book “The Gridlock Economy,” Michael Heller compares this monopolistic use of patents to a
“phantom tollbooth” (a phrase borrowed from Norton Juster’s 1961
children’s book). Biotech companies that patent molecular
techniques act like medieval barons along the Rhine who stifled
trade by taking advantage of weakened imperial authority to extract
tolls from passing cargo boats.

The logical next step in the corruption of the patent system was
the invention of the patent “troll”—a company that buys up
little-used patents not to develop the product in question but just
to prosecute trespassers and extract money from them. The result
has been some huge payouts, including one from BlackBerry.

Dr. Tabarrok argued in his 2011 book “Launching the Innovation Renaissance” that
patents cannot encourage innovation if they raise its costs. In
fields where innovation is a cumulative process, he argued,
restricting patents would cause firms to lose some of their
monopoly rights, but they would gain the opportunity to use the
innovations of others. “The result is greater total

Patents are supposed to prevent imitation, but in practice,
imitation is often more costly than innovation. Most patent
disputes are not about firms copying each other’s inventions but
about two companies discovering simultaneously the next step in an
innovative process. Yet patent law can’t easily handle that type of

The glaring exception is pharmaceuticals, where testing for
safety and efficacy makes innovation extremely costly, but where
imitation can be cheap. In these circumstances, patents are not
only necessary but might be strengthened. Elsewhere they should be
weakened and shortened.

By Matt Ridley | Tagged:  rational-optimist  wall-street-journal