Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

PATENTED VALUE EXTRACTION

The second key way in which value has been extracted from the innovation economy is by the appropriation of returns through the patent system (IPR). In the last century patents, and associated tools like copyrights and trademarks, have gone from being devices to stimulate innovation to means of blocking it.

Patents are protections granted to inventions that are novel, inventive (non-obvious) and suitable for industrial application. In theory they protect the innovator from having his or her idea copied. In practice, however, most innovations are not patented, which in itself shows that patents are not really necessary, as there are other ways to protect innovations, including lead-times and trade secrecy. One study found that between 1977 and 2004, only 10 per cent of ‘important’ innovations were patented. 22Patents tend to be granted for two reasons, which must be held in constant tension for the system to function effectively. The first is to reward and incentivize inventors for developing new ideas by granting them a time-limited monopoly entitlement over their inventions, 23or what is known as the appropriability function of patents. In exchange for this monopoly entitlement, the inventor must reveal detailed information about his or her invention. Which brings us to the second reason: once the patent has expired, the invention can diffuse rapidly through the economy in a process known as the disclosure function of patents. If the system works well, the appropriability function is properly balanced against the disclosure function and the public gains from the rapid diffusion of this new knowledge through the economy. 24

Looked at in this light, patents are best understood not as intellectual property ‘rights’ in the sense of something that is universal or immutable, but as a contract or deal based on a set of policy choices. Something is given up (information about the invention) in exchange for something gained (the ability to exploit the invention exclusively for a limited period). In balancing the private benefits with the broader public good, policymakers must make trade-offs. Granting patents can help increase the incentives for inventors, which in the long run can result in higher rates of technical progress. But such grants also increase the market power of patent holders, resulting in less ‘economic efficiency’ during the time patents are enforceable, and slower knowledge diffusion.

The original purpose of patents is value creation. Patenting your brilliantly cheap and effective innovation is meant to ensure that the hard work you put into the invention is protected for a period during which it earns profits until others are allowed to copy it. That period is currently twenty years. Not all industries make equal use of patents; they tend to be less important for areas like software 25and more so for science-based industries like pharmaceuticals. Indeed, there are also other ways to maintain market dominance, for example through first-mover advantages and secrecy.

To understand how patents relate to the dynamics of value extraction, we must look both at what exactly is being patented and at the structure of the patents themselves. The current dominance of the narrative of entrepreneurs as wealth creators has, I would contend, shifted the balance of the patent system away from an emphasis on the diffusion of knowledge towards private reward. 26

Patents Can Inhibit Innovation

Today, the patent ‘deal’ has become unbalanced, to the extent that the patent system no longer aids the innovation economy but inhibits it. Changes in four major areas are responsible for this unbalancing: what is being patented; the length of patent protection; the ease with which patents can be obtained; and the reasons for seeking patent protection.

First, since the 1980s the patentability domain has been expanding in the US. The domain has moved ‘upstream’: that is, patents are no longer restricted to actual ‘inventions’ (products), but now include ‘discoveries’ (the knowledge behind products). This means that patents are no longer confined to inventions with ‘practical or commercial utility’. Now, they may also apply to discoveries that help in the exploration of future innovative possibilities, such as diagnostic procedures, databases, analytic methods, or scientific principles with some potential practical application. Patents, in other words, are now gatekeepers to the knowledge base.

Instrumental in this shift was the US Bayh–Dole Act of 1980, which made it possible for universities and government research laboratories to hold patents on the results of publicly funded research.

The aim of the Bayh–Dole Act was to strengthen university–industry interactions and incentivize commercialization. Yet granting an exclusive licence on a university-owned patent deters follow-on innovations. Firms must now negotiate – and pay for – a licence before entering a market to access proprietary information that would previously have been available in publications. 27Instead of encouraging better technology transfer – for example, of human stem cell patents held by the University of Wisconsin – the system has delayed technology diffusion. 28

Where the US led, the rest of the world has followed. Such university licensing challenges the traditional ‘open science model’, where basic research outcomes were – as they should be – freely and equally available to everyone. Today, a more proprietary and exclusionary model has taken over, as the university-licensed patents on online search engines such as Google and Netscape illustrate.

Second, legal changes have extended the protection patents offer: now, patents can be renewed. These changes came on the back of persistent lobbying, for instance by pharmaceutical companies, whose pressure resulted in the US Hatch–Waxman Act of 1984, which besides getting the generics industry off the ground (by being able to circumvent some FDA regulations), also resulted in the extension of the patent life for brand-name drugs. And since then the Act has been manipulated by industry lawyers to get patents extended even more. 29There is a parallel here with copyright laws: over the last century the entertainment industry has increased copyright protection from fourteen years to ninety-five. 30

Third, patents are now much easier to obtain. The squeeze on budgets for courts and the FDA, which licenses medical drugs, has cut the number of staff checking patents, leaving them often more likely to grant a patent than not.

And fourth, large companies have increasingly used ‘strategic’ patenting to patent around areas with a view to blocking competitors. This goes against the second role of patents, which is to allow the diffusion of resources. Such strategic patenting can be especially effective when a patent is obtained at an early stage of the development of a technology, before the technical standard is properly determined, or in fast-paced and patent-intensive fields such as ICT or biotech, where innovations are highly interdependent or complementary. 31An early patent gives its owner the chance of setting the dominant standard and blocking improvements others might make. The risk of infringing the patent can also prevent other firms from marketing their products or services.

Another related and growing practice is ‘patent-trolling’: the strategic holding of patents, not to develop or commercialize the underlying idea but deliberately to collect royalties through patent enforcement. A market for patents has emerged in which the value of the patent is divorced – or effectively monetized – from the value of the production of goods or services the patent makes possible. It has been argued that strategic patenting can aid innovation by providing small firms with liquidity as they seek to bear the costs of development and commercialization 32– but the evidence suggests that this practice is also causing harm. James Bessen and Michael J. Meurer, authors of The Patent Litigation Explosion , estimate that ‘patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs’. 33Another study finds that in aggregate, ‘patent litigation destroys over $60 billion in firm wealth each year’, 34with the costs falling more heavily on smaller firms. 35