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The Mother-in-Law of InventionThe patent system sucks because it overrewards and underrewards. Here's a way to make the system work better.

By Steven E. LandsburgPosted Thursday, Jan. 13, 2000, at 3:30 AM ET

When a fireman saves a child from a burning building, he deserves a reward. But the right reward is probably some combination of cash and adulation, as opposed to, say, a license to commit arson. There's a general principle here: It's a good idea to reward good behavior, but it's a bad idea to sanction bad behavior, even as a reward.

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Ordinarily, everyone snickers when this principle is violated. My university used to reward excellence in teaching with a lighter teaching schedule. OK, maybe teaching fewer classes is not the exact moral equivalent of arson, but the irony has a similar flavor and it was not lost on anyone.

Related in Slate

In previous installments of "Everyday Economics," Steven E. Landsburg has highlighted the power of incentives: He argued that they explain criminals' attraction to unlawful acts and independent counsels' tendency to overspend. James Surowiecki reviewed a biography of Andy Grove, the Intel founder whose success is linked to his aggressive defense of company patents. Republic Pictures--creators of It's a Wonderful Life--did not defend its intellectual property well enough, and the movie slipped into the public domain. Matt Alsdorf explained how Republic regained copyright protection. In 1996, a Slate "Committee of Correspondence"--including Herbert Stein, Steve Ballmer, and James Fallows--debated whether Microsoft plays fair with anti-competitive tools, such as patent law.

Related on the Web

Professor Michael Kremer's home page provides his CV and a list of his papers--including his treatise on patent buyouts--but most are not available online. After the paper was published, the Economist argued that patent buyouts could be particularly relevant to the pharmaceutical industry. Do you have a patentable invention of your own? Visit the U.S. Patent and Trademark Office's Web site, where you can access all the necessary forms. But be sure to check its database of patented ideas to make sure someone hasn't beaten you to the punch. The World Intellectual Property Organization traces the development of IP law and argues that patent and copyright protection are increasingly important in a global economy. Most Webheads, however, are supporters of expanding the public domain: Harvard University's "Copyright's Commons" project promotes the cause and provides links to public domain works on the Web.

Why, then, don't we snicker at the patent system? Inventiveness is good for consumers, monopoly power is bad for consumers, and we reward inventiveness by granting 17 years of monopoly power. Why 17? It's someone's idea of a compromise between too little and too much. The result is both too little and too much. It's too little because a 17-year patent is frequently worth far less than the full social value of the invention, so inventiveness is underrewarded and we don't get enough of it. It's too much because any gratuitously granted monopoly power is too much.

The solution, clearly, is to reward successful inventors the same way we reward successful salesmen or successful baseball players: by paying for performance, not with monopoly power but with cash. Who should pay? Mark McGwire is paid, ultimately, by the fans who buy tickets, which makes sense because the fans enjoy watching him. But who should have paid Thomas Edison?

A plausible answer is: the people who enjoy Edison's inventions, which is to say the public at large, through their elected representatives. Thus Professor Michael Kremer, late of MIT and now of Harvard, proposes that all new patents should instantly be purchased by the government and placed in the public domain.

There is at least one successful precedent. When Louis Daguerre invented photography in 1837, the French government purchased the patent and placed it in the public domain. But Kremer seems to have been the first to propose automatic patent buyouts as a matter of policy.

The big question is: What price should the government pay? How can we know what a given invention is worth, and how do we ensure that well-connected inventors don't translate their political clout into inflated prices for their patents? Kremer's answer: Put each new patent up for auction. When the auction is over, flip a coin. If the coin comes up heads, the high bidder pays his bid and gets the patent. If the coin comes up tails, the government pays the high bid and gets the patent. That way, the government never pays more than some private bidder was willing to offer.

Better yet, throw a biased coin that comes up tails, say, 90 percent of the time. Then 90 percent of all patents end up in the public domain, which is not as good as 100 percent but far better than none at all. We do have to give the private bidders some hope of winning so they'll take their bidding seriously.

There's still a problem: Illustration by Robert Neubecker An inventor can rig the auction by getting one of his friends to submit a wildly inflated bid. If the coin comes up tails, the government overpays; if it comes up heads, the inventor essentially buys the invention from himself and suffers no loss. To overcome this problem, Kremer suggests that the high-bid auction be replaced by, say, a third-bid auction: The high bidder wins, but he (or the government) pays the third-highest bid. To rig an auction like that, you'd need three ringers instead of one--still not impossible but perhaps acceptably difficult. (The key insight here is due to the pirate Blackbeard: Three can keep a secret if two are dead.)

You might think inventors would grumble about settling for the third-highest bid, but keep in mind that in a third-bid auction, people tend to bid higher. The third-highest bid in a third-bid auction can easily be about the same as the highest bid in a high-bid auction.

Besides, regardless of the type of auction, there's no reason the government has to pay exactly the same amount as a private winner. When the coin comes up tails, the government can buy the patent for, say, 1.5 times the winning bid. Kremer argues for just such an adjustment so that inventors are compensated not just for the value of their own inventions but also for the inspiration they bring to the next generation of inventors.

How would the government fund such a program? Through taxes, of course. But if the patents are priced properly, the average taxpayer will get back more than he pays through improved consumer products and lower prices. The real downside to Kremer's proposal is this: Making patents more lucrative does not encourage inventiveness generally; it encourages only a particular kind of inventiveness--namely the kind that tends to result in patentable inventions. And in doing so, it draws people away from other inventive activities.

If patent buyouts were standard practice, smart people like Michael Kremer might be inventing new and better kitchen utensils instead of coming up with important ideas like making patent buyouts a standard practice. Even now, good but unpatentable ideas are surely underrewarded and hence underproduced, which is all the more reason to take it seriously when one comes along.

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Steven E. Landsburg is the author, most recently, of More Sex Is Safer Sex: The Unconventional Wisdom of Economics. You can e-mail him at .

COMMENTS

Highlights from the Fray:

If I understand Steven Landsburg's article correctly, the one person who would never be able to own a patent is the person who filed it. Surely the problems with that incentive system are obvious--the inventor is most likely the one best able to exploit the invention efficiently. It seems to me that this scheme would tend to make useful inventions more likely to be kept as trade secrets.

--{{David Wall#2:mailto:wall@transmeta.com}}

(To reply, click here.)

1. The current term of a patent is 20 years from date of application vice the previous term of 17 years from date of issuance.

2. In any auction process, the inventor should be guaranteed reimbursement of all fees and expenses expended in developing the technology patented and in obtaining the patent itself.

3. Most patents are not turn-key technologies. Most products on the market covered by patents are the result of years of additional research, development, testing and evaluation conducted subsequent to patent issue.

--Bill Phelps

(To reply, click here.)

The irony this time is that your scheme would actually incentivize some to avoid the patent process so as to avoid losing all control of their innovation.

--Gary Esolen

(To reply, click here.)

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