From Mises Wiki, the global repository of classical-liberal thought
Jump to: navigation, search

A patent is a government grant to an inventor of the right to exclude others from making, using, or selling an invention, usually for a limited period. Patents are granted for new and useful machines, manufactured products, and industrial processes and for significant improvements of existing ones. Patents also are granted for new chemical compounds, foods, and medicinal products, as well as for the processes used to produce them. In some countries patents can be granted even for new forms of plant or animal life developed through genetic engineering.[1]


The first recorded patent for an industrial invention was granted in 1421 in Florence to the architect and engineer Filippo Brunelleschi. The patent gave him a three-year monopoly on the manufacture of a barge with hoisting gear used to transport marble. It appears that such privileged grants to inventors spread from Italy to other European countries during the next two centuries. In many cases governments issued grants for the importation and establishment of new industries, as in England at the time of Queen Elizabeth I (reigned 1558–1603). However, the sentiment slowly grew that the English crown was abusing its authority to grant such rights, and the Privy Council and then the common-law courts began to scrutinize patents more carefully. Finally, in 1623 Parliament enacted the Statute of Monopolies. Although the statute prohibited most royal monopolies, it specifically preserved the right to grant "letters patent" for inventions of new manufactures for up to 14 years.[1]

The Statute did not replace intellectual competition with intellectual monopoly, but an indefinite and broad government monopoly with a definite and restricted private monopoly. This, no doubt, represented progress in terms of private property rights and incentives to private economic initiative.[2]

In the United States the Constitution authorizes Congress to create a national patent system to "promote the Progress of Science and useful Arts" by "securing for limited Times to ... Inventors the exclusive Right to their respective ... Discoveries" (Article I, Section 8). Congress passed the first Patent Statute in 1790. France enacted its patent system the following year. By the end of the 19th century, many countries had patent laws, and today there are more than 100 separate jurisdictions regarding patents.[1]

Patents in the US

In the United States a patent is a property right in inventions, that is, in devices or processes that perform a "useful" function. However, a patent actually only grants to the patentee the right to exclude (i.e., to prevent others from practicing the patented invention); it does not actually grant to the patentee the right to use the patented invention. (Suppose A invents and patents a better mousetrap, which has a Nitinol (memory metal) spring for better snapping ability. Now suppose B invents and patents a mousetrap with a Nitinol spring covered with non-stick coating, to improve the ability to remove mouse remains while still providing the Nitinol-driven snapping action. B has to have a mousetrap with a Nitinol spring in order to use his invention, but this would infringe upon A’s patent. Similarly, A cannot add the non-stick coating to his own invention without infringing upon B’s improvement patent. In such situations, the two patentees may crosslicense, so that A can practice B’s improvement to the mousetrap, and so B can use his own invention.)

Not every innovation or discovery is patentable. The U.S. Supreme Court has, for example, identified three categories of subject matter that are unpatentable, namely "laws of nature, natural phenomena, and abstract ideas." Reducing abstract ideas to some type of "practical application," i.e., "a useful, concrete and tangible result," is patentable, however. U.S. patents, since June 8, 1995, last from the date of issuance until twenty years from the original filing date of the patent application (the previous term was seventeen years from date of issue).

It is widely, and incorrectly, believed that in the U.S. system, the inventor who files first at the patent office has priority over those who file later. However, the U.S. system is actually a "first-to-invent" system, unlike most other countries, which do have a "first-to-file" system for priority.[3]

The impact of patents

Life expectancy

In many countries, holders of patents must pay an annual renewal fee in order to keep their patents in force. If the renewal fee is not paid in any single year the patent is permanently canceled. If we assume that renewal decisions are based on economic criteria, agents will renew their patents only if the value of holding them over an additional year exceeds the cost of such renewal.

According to a survey of European data on renewal fees and patent survival proportions published in 1986, about half of all patents are renewed through age 10, indicating a significant expectation of some “usefulness” for the majority of patents for some non-negligible time period. On the other hand, the same data indicate that about half of all patents are not renewed within ten years, indicating that the expected value of the future income stream from these rights has fallen below the rather low renewal cost. This implies that the majority of patents are either of low value, or that their value depreciates (obsoletes) rapidly, or both. About 10 percent of all patents survive and pay the fees for the whole statutory period and obviously include a smaller number of very valuable patents.[4]

Impact on productivity

According to Zvi Griliches, a leading expert on the study of productivity[4]:

Not all of productivity growth is due to invention and only some fraction of the latter arises from patented inventions. If one takes 1.5 to 2.0 percent as the approximate growth rate per year in total factor productivity, at least half of it is likely to be due to the growth in the quality of the labor force, economies of scale, and various reallocations of capital between assets and industries. Moreover, it is unlikely that patented inventions could account for more than half of all the relevant advances in knowledge. This leaves us with at most a quarter of total productivity growth, and an unknown fraction of its fluctuations, to be attributed to patented invention.

Even this probably overstates the net effect of patents, since, in principle, we would like to estimate the marginal benefits derived from them, i.e., the inventions that would not have been produced without them. Since patent protection increases the average return on inventive activity devoted to patentable inventions, thereby inducing more activity of this kind, it seems safe to conclude that the elimination of patent protection would probably adversely affect production of such inventions. But what would be the magnitude of that loss? We cannot simply assume that all patented inventions are due to the existence of patents, since many would have been developed even without that incentive.[5]


A common argument in favor of patent law is that in order to get a patent you must reveal the secret of your invention. Are patent laws a cure for trade-secrecy? Granting a legal monopoly in exchange for revealing the "secret" of the innovation is one way to make innovations more widely available in the long run. However, as a number of economists have pointed out, in the simplest case this argument fails.

Suppose that each innovation can be kept secret for some period of time and that the length of legal patent protection is 20 years. Then the innovator will choose secrecy in those cases where it is possible to keep the secret for longer than 20 years, and choose patent protection in those cases where the secret can be kept only for less than 20 years. In this case, patent protection has a socially damaging effect. Secrets that can be kept for more than 20 years are still kept for the maximum length of time, while those that without patent would have been monopolized for a shorter time, are now monopolized for 20 years. Outside the pharmaceutical industry, where the regulatory system effectively forces revelation, trade-secrecy is considerably more important than patent. Repeatedly, in surveys of R&D lab and company managers only 23%-35% indicate that patents are effective as a means of appropriating returns. By way of contrast, 51% argue that trade-secrecy is effective.

While replacing secrecy with legal monopoly may have some impact on the direction of innovation, there is little reason to believe that it actually succeeds in making important secrets public and easily accessible to other innovators. For most innovations, it is the details that matter, not the rather vague descriptions required in patent applications. A generic idea revealed in a patent can be easy to understand and "copy," but of no practical value whatsoever. The useful ideas do not have to be revealed in the patent nor easy to imitate without reinventing them from scrap.[6]

Patents in software industry

In the U.S., prior to the 1981 U.S. Supreme Court decision in Diamond vs Diehr, it was not possible to patent software at all and the current craze to patent every click of the mouse originates in the subsequent extension of patents to software products in the 1994 Federal Circuit Court ruling In re Alapat.

If key innovations that occurred prior to 1981 were patented (graphical user interfaces, the widgets such as buttons and icons, the compilers, assemblers, linked lists, object oriented programs, databases, search algorithms, font displays, word processing, computer languages etc.), progress in the software industry would never have taken place.[7] According to Bill Gates "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today."[8]


  1. 1.0 1.1 1.2 Encyclopædia Britannica. "patent. (2011).", referenced 2011-09-08.
  2. Michele Boldrin and David K. Levine. Against Intellectual Monopoly, Chapter 3, p. 48-49.
  3. Stephan Kinsella. Against Intellectual Property, page 10-11, 14. Referenced 2011-09-08.
  4. 4.0 4.1 Zvi Griliches. "R&D and Productivity: The Econometric Evidence", National Bureau of Economic Research, ISBN: 0-226-30886-3, Publication Date: January 1998, Chapter: "Patent Statistics as Economic Indicators: A Survey". Referenced 2011-09-22.
  5. Julio H. Cole. "Patents and Copyrights: Do the Benefits Exceed the Costs?" (pdf) Journal of Libertarian Studies, Volume 15, no. 4 (Fall 2001), pp. 79–105. Referenced 2011-09-22.
  6. Michele Boldrin and David K. Levine. Against Intellectual Monopoly, Chapter 7, p. 186-189.
  7. Against Intellectual Monopoly, Michele Boldrin and David Levine, p.18. Referenced 2011-10-13.
  8. Bill Gates. "Challenges and Strategy", May 16, 1991. Quote continues: "I feel certain that some large company will patent some obvious thing related to interface, object orientation, algorithm, application extension or other crucial technique. If we assume this company has no need of any of our patents then the have a 17-year right to take as much of our profits as they want. The solution to this is patent exchanges with large companies and patenting as much as we can.". Referenced 2011-10-13.