The Competitiveness of Nations in a Global Knowledge-Based Economy
The Economic Theory Concerning Patents for Inventions
1
(Ernest Cassel Professor of Commerce in the
Economica, New Series, 1
(1)
Feb., 1934,
30-51.
PATENTS
for inventions comprise a special form of property,
created by .statute law. In the
United Kingdom, for -instance, patents “sealed with the seal of the
Patent Office [which] shall have the same effect as if it were sealed with the
Great Seal of the United Kingdom, and shall have effect throughout the United
Kingdom and the Isle of Man” are granted under the Patents and Designs
Acts, 1907 to 1932, every patent relating to
one invention only and having a duration of sixteen years in the first instance;
subject to fulfillment of the conditions laid down in the
Acts.
The statutes creating patents in the various countries
impose limitations on the exercise of the property rights which they comprise,
but these are not the only peculiarities of this form of property. Despite the limitations, property rights
in patents are more potent than is generally true of private property. The significance of private property in
the economic system was enunciated long ago with great clarity by David Hume in
his Enquiry Concerning the Principles of Morals. Property, he argued, has no purpose
where there is abundance; it arises, and derives its significance, out of the
scarcity of the objects which become appropriated, in a world in which people
desire to benefit from their own work and sacrifice. Systems of Justice, he went on, protect
property rights solely on account of their utility. Where the security of property is
adequately assured, property owners generally see to it, that scarce “means”
are directed to those uses which, within their knowledge and judgment, are
most productive of what they want. Such is the diffusion of private property
and of the desire to use it, that it is at any rate generally true that there is
not a
1. Substantially a paper read before Section F of the
British Association at
30
sufficient concentration of ownership of the supplies of
a particular good, and of all the easily substitutable alternatives for it, to
enable the owners to control the prices of the property they own. Neither the withholding, nor the disposal
of the property of any one owner will in general affect appreciably the price of
the commodity in question. Hitherto, this inability of property
owners to control prices has been generally approved. If we except recent tendencies towards
“planned monopolies,” most proposals to interfere with property rights have been
aimed in the past at prohibiting the concentration of supplies of particular
commodities under a single ownership, in order to prevent the property owners
from raising the price by withholding part of the supply.
It is a peculiarity of property rights in patents (and
copyrights) that they do not arise out of the scarcity of the objects which
become appropriated. They are not a
consequence of scarcity. They are the deliberate creation of
statute law; and, whereas in general the institution of private property makes
for the preservation of scarce goods, tending (as we might somewhat loosely say)
to lead us “to make the most of them,” property rights in patents and copyright
make possible the creation of a scarcity of the products appropriated
which could not otherwise be maintained. Whereas we might expect that public
action concerning private property would normally be directed at the prevention
of the raising of prices, in these cases the object of the legislation is to
confer the power of raising prices by enabling the creation of scarcity. The beneficiary is made the owner of the
entire supply of a product for which there may be no easily obtainable
substitute. It is the intention of
the legislators that he shall be placed in a position to secure an income from
the monopoly conferred upon him by restricting the supply in order to raise the
price.
4.
Expectations of the Patent System
It may be assumed that the statutes creating these
patent and copyright monopolies would not have been placed, or allowed to
remain, upon the statute books in the absence of a widespread expectation of
public advantage from their operation. Economists have of recent years found new
difficulties in stating the effects of monopoly upon the magnitude of the
national income, but it is nevertheless still broadly accepted that monopoly
conditions tend to promote the diversion of the scarce means of production from
a more to a less generally preferred utilisation. It is of interest, therefore, to review
the expectations of those who approve of the patent system,
to
31
consider the implications of those expectations, and the
extent to which they have been realised. Are those expectations reasonable in
themselves? Are the devices which
have been adopted for their realisation appropriate? Has their operation resulted in
objectionable consequences which may not have been
foreseen?
As we have seen, the purpose of patents for inventions
is, by giving an inventor the control for a definite period over the disposal of
his invention, to make it easier for him to derive an income from it. With what objects ? As soon as we enter into an examination
of motive, we are, of course, venturing upon uncertain and debatable ground.
It will, nevertheless, I think, be
generally agreed that the ultimate aim is to encourage inventing. This is undoubtedly the expectation and
hope of the vast majority of disinterested advocates of patents. The aim of all advocates, whether
inventors themselves or not, is to make inventing pay better, and those at any
rate who are not inventors hope for more inventions as a consequence. Even those supporters of the patent
system who would describe their argument as purely ethical in character would
probably agree that their ultimate concern is that inventors, qua
inventors, should be enabled to survive. They may argue that their concern is to
see that producers of inventions are not robbed of that which ought to be, even
if it may not be in common law, their property; and yet their interest in
inventors is very likely derived from a more fundamental belief that inventions
are especially good in themselves, that the production and utilisation of
inventions ought, therefore, to be encouraged, and that the way to attain that
end is to extend the sphere of private property so as to increase the
profitability of “inventing,” and of the exploitation of inventions, as compared
with other occupations. We are
surely entitled, therefore, to attribute the existence of the patent law to a
desire to stimulate invention.
In order to examine the effects of the patent system on
invention it is, therefore, necessary first of all to ask what determines the
amount of invention that takes place, and we must start with a working
definition of “invention.” To give
it a wide enough meaning - much more comprehensive, by the way, than that to
which patent law has come to be applied - invention is the devising of new ways
of attaining given ends. We might
widen the definition still further, by including the devising or suggesting of
new ends themselves as inventions, but this would probably involve too great a
departure from
32
ordinary usage. We may all agree that a new machine for
making cigarettes is an invention but that a suggestion for the abandonment of
cigarette-smoking in favour of something else is not. If we definite invention as the devising
of new ways of attaining given ends it will be best to make the “given ends” as
concrete as possible by excluding from the category of “invention” any change in
consumers’ taste.
This somewhat comprehensive definition of invention
enables us to include, as we surely must, all new ways of attaining given ends,
although many may not be immediately, if ever, adopted. A new device, employing a recently
discovered and revolutionary scientific principle, may be mechanically
excellent, and yet not capable of commercial exploitation. The time and extent of its adoption will
depend upon price conditions. Changes in relative prices may lead to
the abandonment of one much utilised process and the substitution of another,
devised long since but never before adopted.
8. Autonomous
and Induced Invention
A useful distinction has been drawn by Professor Pigou
between different types of change in economic conditions (and has been applied
to inventions by Dr. J. R. Hicks), distinguishing those which are “autonomous,”
occurring spontaneously rather than in response to any environmental impulse,
from those which are “induced” by environmental changes and owe their origin
therefore to circumstance. Different writers have assessed very
differently the relative importance, as regards their number, of inventions
which fall into these two categories, and when we carry the analysis a step
farther, and attempt a classification, within the second category, of the
various circumstances which may induce invention, still more difference of
emphasis is revealed in the views of the various
authorities.
9.
Spontaneous or Autonomous Invention
Spontaneous or “autonomous” inventions include those
which arise from the existence of what Professor Taussig calls the “instinct of
contrivance.” So far as these are
concerned, necessity is not the mother of invention; the act of inventing rather
is a necessity in itself. The
inventor cannot help it. Just as
some people, who may never be recognised as poets, continue to pour out volumes
of verse, so others may spend their time or part of it in devising contrivances
or- inventions. Sir Josiah Stamp in
his stimulating essay on Invention (Watt Anniversary Lecture, Greenock,
1928, reprinted in Some Economic Factors in Modern Life) inclines to the
view that the flow of invention is largely explained in this way.
‘The
33
inventor,’ he says, ‘is still sui generis, and
emerges from the ranks of engineers, physicists, and chemists, not indeed as a
“sport,” but as a special product, which is touched by no “economic spring.”
The sense of curiosity and the idea
of fame play a greater part than the economic reward.’ Not all of the inventors, however, whose
output is involuntary, are impervious to prospects of gain. Like artists, some may turn their talent
to profitable use. The amount and
rate of flow may be invariable, but its direction may be influenced by
inducements of one sort or another. Inventing may be spontaneous, but the
nature or form that it takes may be controlled by circumstance. It will probably be generally agreed that
the number of “involuntary inventors” whose output is completely unaffected by
economic conditions is at least as small as that of artists who work without
regard to the saleability of their output.
More definitely in the category of “spontaneous”
inventions are those which are made by accident, for the most part no doubt as
the chance by-product of activity directed to some other purpose. Every scientific worker knows how
frequently an enquiry leads to discoveries which answer questions very different
from those which prompted the investigation. Undoubtedly, in the field of invention,
contrivances are accidentally hit upon in the same way; but in all probability,
the majority of these “chance” inventions are also indirectly “induced” - one
stage removed, as it were - for the greater part of the activity out of which
they arise is influenced by circumstance. Of a somewhat similar character, again,
are the inventions of “amateurs” who, when inspecting the specialised technique
of a particular field of production, being prompted by curiosity rather than
hope of gain, are enabled by their unusual possession of experience of some
other technique to suggest improvements and new devices which fail to occur to
the minds- of practitioners themselves. The timing, at least, of such inventions
is undoubtedly largely fortuitous.
Induced inventions owe at any rate their nature, if not
their volume, to the circumstances of time and place. One very potent cause affecting the
amount of inventions is clearly the rate of growth of scientific knowledge.
The greater the volume of new
scientific discoveries, the more rapid will become the rate of application of
these discoveries by inventors to purposes of production. Invention does not, of course, wait upon
the completion of scientific discovery. As William Edward Hearn wrote seventy
years ago, in what is surely still
34
the best theoretical discussion “Of the Circumstances
which Determine the Extent of Invention” (in his Plutology, ch.
xi): “The knowledge that is imperfect for the purposes of speculation is often a
sufficient guide for the daily business of life.” “Even at the present day,” he adds, “many
processes of our most successful arts have not yet received a scientific
explanation. … But in all empirical arts, the limit of improvement is soon
reached.”
11.
Specialisation & Division of Labour
A second influence on the nature, if not on the volume,
of new invention is specialisation and the division of
labour.
The specialisation which has been made possible by the
great increase in the number of scientific workers has in itself tended to
increase the rate of scientific discovery. Similarly, the division of labour in
production has exerted an influence on invention. Adam Smith made the point perhaps too
forcibly (Wealth of Nations, Book I, ch. i) when he observed that “the
invention of all machines by which labour is so much facilitated and abridged,
seems to have been originally owing to the division of labour.” W. E. Hearn and, following him, W. S.
Jevons (Principles of Economics) both criticised the extravagance of
Smith’s language, calling, attention to the number of important inventions which
have emanated from unexpected quarters. Yet they did not deny the obvious truth
that specialisation in product and the division of labour make possible the
detailed consideration of technological processes, and that inventions of new
processes do arise out of such continuous and intimate consideration of
detail. Whether there is in
consequence a net addition to the volume of invention, as distinct from a
change in its nature, is another matter.
It is true that the growing mechanisation of industry
withdraws ever more of the active and trained minds from actual machine
operation and may in that way reduce the number of inventions that would
otherwise be made in that field, but it would be a very incomplete account of
the effects of the division of labour on invention that stopped there. Specialisation has, of course, released
the more able and ingenious and mentally alert workers from routine tasks for
the performance of just such special tasks as inventing. It has made possible the career of
professional “inventor.” It
has moreover resulted in the increased wealth of communities, which has made
possible the increase of knowledge by the endowment of research, and the spread
of knowledge and the training of ability by the endowment of education. These
in
35
turn have increased on the one hand the field for
invention, and on the other hand, the number of active
inventors.
Increasing wealth, the division of labour, the progress
of science, then, are clearly circumstances which induce in these various ways
the invention of new processes and devices. It remains to add another circumstance,
which provides the incentive for the making of particular inventions, and that
is the existence of favourable price conditions. Dispute there may well be as to the
effect of price changes, and of the consequent emergence of new opportunities
for profit and new probabilities of loss, on the volume of invention that
takes place as a whole in a given period, but as to the important directive
influence of price conditions upon by far the greater part of inventive
effort there can be no doubt at all. Hearn wrote: “The principal circumstance
which affects the progress of inventions is the strength of the motive for their
use. When the demand is
sufficiently strong, the supply generally overtakes it…” The price conditions which induce
invention in particular fields are those which offer a special return to
inventors in those fields. The
inventions may be induced either by the possibility of quite exceptional profits
to those who can cut costs still further during times of flourishing trade, when
an industry is already profitable, or by the imminence of certain loss to
entrepreneurs who have fixed investments in industries which are depressed, and
whose only hope is an innovation which will reduce expenses below receipts.
During the post-war years, for
instance, inventions have been induced by price conditions in both the coal
industry and the rubber industry on the one hand, and in the motor-car and radio
industries on the other.
Hitherto, the interest of economists in the relation
between inventions and industrial fluctuations has been concentrated mainly on
the part played by inventions in the causation of fluctuations. (Cf., e.g. Mr. D. H. Robertson’s Study
of Industrial Fluctuations, and Professor Pigou’s Industrial
Fluctuations.) The problem of
the reverse effects of business fluctuations on the flow of inventions is a no
less fascinating subject of study, about, which a number of unargued and
contradictory statements have been made. It is important to distinguish between
the making of an invention and its adoption. Sir Josiah Stamp, in the paper already
referred to, says: “On the whole I incline to the view that the periods of rapid
and important invention tend to be periods of larger
differential
36
profits.” The view is not supported in the paper by
evidence or argument. Professor
Pigou in his Industrial Fluctuations (ch. iv, p.43) is concerned mainly to refute the
proposition that fluctuations in general business activity may be initiated by
variations in the rate at which ordinary minor inventions and improvements are
made. He argues that even in the
case of major inventions it is the decision to exploit inventions rather than
the making of the inventions itself that is the major cause of disturbance, the
time and intensity of exploitation being largely determined by the state of
business confidence. “There is,” he
says, “… a strong probability that invention as a whole will fluctuate very much
less than invention in any given representative occupation,” - i.e. he implies
that there is a transfer of inventive activity from one industry to another,
expansions in one field being compensated more or less by declines in invention
elsewhere; and he states definitely that “there is evidence that in slack
periods technical devices and improvements accumulate in the sphere of
knowledge, but are not exploited till times improve.” The nature of the evidence is not stated.
It presumably relates to the
statistics concerning the rate of exploitation rather than of invention itself.
Such an accumulation of inventions
during depressions is compatible with increasing, stationary or declining
absolute rates of invention, being purely relative to the rate of exploitation,
which one might reasonably expect to decline when business confidence is at a
low ebb. It is of interest to
notice, however, that elsewhere in the same study (p. 12) Professor Pigou asserts
that “in periods of depression the amount of intelligence put into
production is, in general, larger, partly because relatively inefficient
business men are compelled to sell out to others, but mainly because those who
remain in business ‘are put on their mettle, and exert themselves to the utmost
to invent improved methods, and to avail themselves of the improvements made by
others.’” This would imply an
increased rate of both invention and exploitation during depressions, at
least on the part of those who remain in business. [1
1. I cannot trace any attempt hitherto at statistical
investigation of the relationship between disturbances in industrial activity
and variations in the rate of invention. Professor Pigou, having in mind, of
course, the reverse connection, considers that “it is not in fact possible to
demonstrate a close statistical correlation between the making of industrial
inventions and neighbouring disturbances in general industrial activity.”
That may well prove to be true.
I am myself much disposed after
somewhat close and prolonged study to hope that the detailed records of patent
applications available over a long period in this and other countries can be
made to throw light on this and the other related questions. The returns are available separately for
different [categories of industry (in this country, for
instance, over a long period, there are 146 categories), those
concerning provisional applications provide excellent evidence of the date at
which inventions are made, and the subsequent history of the patents can be used
for a study of the timing of the actual exploitation. In particular instances, the, influence
of adversity as well as of prosperity within an industry upon the display of
inventiveness can easily be traced beyond reasonable doubt. With due, care it may be possible also
to draw conclusions with regard to the relation between the display of
inventiveness and industrial fluctuations in general. The work is progressing, but further
discussion must be reserved for another occasion.]
HHC: [bracketed]
displayed on p. 38 of original
37
15.
Conclusions About Induced Invention
In the meantime certain conclusions may be hazarded
concerning induced inventions; firstly, that every price change, by creating
cost difficulties in certain fields and opportunities for profit-making in
others, provides a double stimulus to invention, and secondly that the larger
the price change the greater will be the stimulus to invent. Thirdly, during periods of disturbance of
the general level of prices, a more general stimulus to inventions and to the
exploitation of existing inventions may be expected, for we know that individual
price relationships are disturbed whenever, for monetary reasons, the general
price level shifts. Fourthly, any
government measures designed especially to reward inventors whether by
subsidisation or by the patent system, i.e. the grant of monopoly rights over
the utilisation of their inventions, may be expected, because of their influence
upon price conditions, to affect the flow of inventions. It is with the patent system that we are
here primarily concerned. Despite
the publication of a large body of specialist literature, in the nineteenth
century in particular, on the merits of patent systems, they have received scant
attention by economists in the standard treatises.
The patent system may, on the one hand, be expected to
affect the making of inventions in two ways. The first is to divert inventive activity
into those fields in which the monopoly grant will be expected to prove most
remunerative. It may, secondly,
affect the total amount of inventive activity. The patent system may, on the other
hand, exercise another effect of perhaps equal importance. It may influence the ability or
willingness of entrepreneurs to make use of new inventions after they have been
made.
It will be convenient to consider first the effect of
the patent system on the amount of inventive activity. Considerable difference of opinion on
this aspect of the question is revealed by the scant references made by
economists who go out of their way to praise the patent system. On the one hand there-is the view,
perhaps best represented in our own time by
38
Professor J. B. Clark in his Essentials of Economic
Theory (ch. xxi), that without the patent system there would be very little
inventing, and very little adoption of inventions by producers, at all. “If an invention became public property
the moment that it was made,” he says, “there would be small profit accruing to
any one from the use of it and smaller ones from making it… The system
which gave a man no control over the use of his inventions would result in a
rivalry in waiting for others rather than an effort to distance others in
originating improvements. This fact
affords a justification for one variety of monopoly. … Patents stimulate
improvement, and the general practice of the nations indicates their recognition
of this fact.” For the expression
of a very different view we may turn to Professor F. W. Taussig (Inventors and Money-Makers),
who throws doubt upon what he designates as the view of the older
utilitarians, that “men contrived simply because this was conducive to
gain, and would not contrive unless prompted by the experience and prospect of
gain,” and suggests instead that invention may arise mainly as a spontaneous
manifestation of a human “instinct of contrivance.” If this is so, “we may be led to
conclude,” he adds, although it is not his conclusion, “that the patent system,
for example, is a huge mistake.” Later, he observes that “the
defenders of patent legislation often descant on the public benefit from
inventions as if there were a special moral desert on the part of the projectors
and patentees. They put their case
badly. What deserves emphasis is
the influence of calculated profit in directing the inventor’s activity,
spontaneous though it be, into channels of general usefulness.” The patent system is commended because it
directs rather than increases inventing activity. Professor Pigou puts the same view still
more definitely (Economics of Welfare, 2nd edition, Part II, chapter
viii): “The patent laws aim, in effect, at bringing marginal private net product
and marginal social net product more closely together. By offering the prospect of reward for
certain types of invention they do not, indeed, appreciably stimulate inventive
activity, which is, for the most part, spontaneous, but they do direct it into
channels of general usefulness.” The only supporting evidence is a
reference back to Professor Taussig.
The economists of the early nineteenth century who
considered the question were as definite as Professor J. B. Clark that
inventions would practically cease if the patent system were abandoned. Jeremy Bentham was in no doubt
at
39
all (Rationale of Reward): “With respect to a
great number of inventions in the arts, an exclusive privilege is absolutely
necessary in order that what is sown may be reaped… He who has no hope
that he shall reap will not take the trouble to sow.” John Stuart Mill’s argument was similar.
(Principles of Political Economy, Book V., ch. x, s. 4.) As Professor Taussig said, the
utilitarians assumed that the patent system was responsible for the greater part
of inventing activity. The question
which they one and all failed to ask themselves, however, is what these people
would otherwise be doing if the patent system were not diverting their
attention by the offer of monopolistic profits to the task of inventing. By what system of economic calculus were
they enabled to conclude so definitely that the gain of any inventions that they
might make would not be offset by the loss of other output? By no stretch of the imagination can the
inventing class be assumed to be otherwise unemployable. Other product which is foregone when
scarce factors are diverted in this way completely escaped their
attention.
In the view of Bentham, the patent system “produces an
infinite effect, and it costs nothing.” Jean Baptiste Say, although subsequently
more critical, made a similar mistake in his Traite (Prinsep translation,
Book I, ch. xvii): “Privileges of this kind no one can reasonably object to; for
they neither interfere with, nor cramp any branch of industry, previously in
operation.” The withdrawal from
them of scarce resources is ignored. To John Stuart Mill, again, the only
public loss was merely the postponing of a part of the increased cheapness which
the public owe to the inventor.
Manufacturers, although some of them were inventors
themselves, who gave evidence advocating the abolition of the patent system
before a Select Committee of the House of Lords in 1851, were no doubt enabled
by self-interest to perceive the loss more clearly. I. K. Brunel, for instance, believed that
because of the patent laws people spent their time trying to invent, who would
do better for themselves at other things. In particular, he maintained that workers
wasted their time and ruined themselves, trying to think out patentable
inventions, when development would be much quicker if they were not thus
distracted from making improvements, and refinements of a non-patentable kind.
In the ‘sixties James Stirling,
famous in another connection for his rebuke of John Stuart Mill at his
capitulation to a sentimentally “soft school of
40
political economy,” emphasised the dangers of an over-stimulation of
inventions by the patent system. Yet at the beginning of this century Professor J.
B. Clark was still writing: “If the patented article is something which society
without a patent system would not have secured at all - the inventor’s monopoly
hurts nobody… His gains consist in something which no one loses, even
while he enjoys them.” No inkling
here that the patent inducement to invent diverts scarce human effort from other
production, and that the subsequent exploitation of patents again interferes
with the disposition of scarce factors which would obtain under competitive
conditions.
If the views of Professors Taussig and Pigou, that the
amount of inventive activity is in the main unaffected by the inducement
offered by patent monopolies, come to be substantiated, the traditional case for
the system will have been destroyed without further need for criticism; but it
would surely be unreasonable to accept their view without strong supporting
evidence. It seems unquestionable
not only that a very considerable volume of inventive activity must definitely
be induced by price conditions, but also that that activity is diverted by price
movements from other types of endeavour as well as from other fields of
invention. Entrepreneurs faced with
new difficulties or with new opportunities will divert not only their own
attention, but that of every technician who can be spared, from the business of
routine production to that of urgent innovation. They will not rely exclusively upon those
types of professional inventors whose autonomous output pours out in a stream of unvarying size, and
some of whom may be
prepared, in return for the inducements which the entrepreneurs can offer, to
transfer their spontaneous activity to their service. It cannot be assumed that all who are
capable of innovation spend their whole lives in inventing. Many of them are also able administrators
and production controllers; some in the past have been clergymen and barbers,
and in our own time there is a steady flow of technicians from the research
laboratories of pure science into those of industrial invention and out again.
Price changes, particularly if
prices appear likely to take a new “set,” may therefore be expected to lead to
an increase of invention and a decline in other activity.
The patent system makes possible this type of price
movement. It enables those who
“have the monopoly of the right to use a patented invention to raise the price
of using it for the whole term of the patent, within the limits fixed by the
elas-
41
ticity of demand, and in -that way to derive a larger
profit from the invention than they could otherwise obtain. The effect must surely be to induce a
considerable volume of activity to be diverted from other spheres to the attempt
to make inventions of a patentable type.
It will be convenient at this stage to consider both
kinds of diversion together, i.e. from other kinds of activity into invention,
and from one kind of inventive activity to attempts to make such patentable
inventions as will, in the expectation of the inventor or of those directing his
efforts, produce the greatest possible remuneration under a régime of monopoly.
It will be recollected that
Professors Taussig and Pigou declare the merit of the patent system to be the
inducement it offers for the production of inventions of greater “general
usefulness” than would
otherwise be made.
It will be clear first of all that there is one class of
inventions, on the making of which the patent system can exert no effect at all,
namely those arising spontaneously, whether by accident or as manifestations of an “instinct of contrivance,” in persons whose inventing
is uninfluenced by all economic stimulus. It is hardly likely that this class is
very important in volume or in kind.
The making of all other categories of patentable
inventions may, however, be induced by the patent system. It does not follow, of course, that they
will necessarily all be made in response to this inducement, for in the absence
of patents a sufficient price incentive might be present, in open market
conditions, to direct inventive activity to the same field; but in so far as the
inducement is furnished only by the expectation of a patent monopoly, a
diversion of resources takes place and other production is foregone. What grounds are there for concluding
that the output induced by this type of monopoly has any greater claim to be
regarded as “generally useful” than that which would have been induced in its
absence by the price conditions of the open market? I suggest that such a conclusion runs
counter to all general presumptions concerning the disposition of scarce
productive resources in a régime of monopolistic control as contrasted with
open competition. The nearer
that market conditions approximate to pure competition, the less likely does it
become that any entrepreneur or property owner will find it possible to
influence prices by withholding supplies, and the more likely in consequence
does it become that all resources, being put to the uses which
maximise
42
the incomes of their owners, will yield their greatest
aggregate product. In perfect
competition all production will take place at lowest cost per unit produced.
How can it be argued that any
departure from such a condition, induced by the grant of monopoly power to raise prices
and increase a sectional income by restricting output, will achieve
greater “general usefulness?
The only conceivable line for such an argument to take
would seem to be that ultimately the inventions of a patentable type
which will be made in response to the grant of a temporary monopoly will possess
a sufficiently greater general usefulness than would result from the other
inventions or other output immediately foregone, to outweigh the immediate loss.
There surely exists no scientific
reason for making any such claim for patentable inventions in general, as
compared with alternative output. It is conceivable that exceptional cases
may arise, in which a new mechanism becomes socially desirable for a specific
and very special purpose, and that prolonged research and experiment seem
inevitable for its perfection, while no remuneration is likely to be forthcoming
in the interim from models which are not wholly successful. In such cases, special inducements might
be necessary to secure the end in view. Thus, for example, if a flying machine were needed
capable of non-stop flights round the Equator, and machines with smaller ranges
were of no utility, entrepreneurs might not be forthcoming and there might be a
case for a special fund to finance the making of the invention. A patent system applicable to inventions
in general clearly cannot be justified, however, by exceptional circumstances of
this kind. Economics, in short, has
not yet evolved any apparatus of analysis which would enable us to pronounce
upon the relative productivity of this particular infant industry - the
production of inventions; nor does it provide any criteria for the approval of
this method of special encouragement.
The contention still remains for consideration that the
patent system is necessary in order to secure the exploitation, if not the
production of inventions. The main
argument is that entrepreneurs will be reluctant to invest in plant which others
may also acquire for purposes of competition. It need not detain us for long. It cannot be assumed that patentable
inventions in general necessitate new investment in such large units that fears
of duplication will provide a frequent deterrent to entrepreneurs. It is still exceptional for a single
specialised productive unit to be sufficient to meet the bulk of the
demand
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for a product. Neither can it be assumed that inventors
would cease to be employed if entrepreneurs lost the monopoly over the use of
their inventions. Businesses employ
them to-day for the production of non-patentable inventions, and they do not do
so merely for the profit which priority secures. In active competition, the condition in
which new devices are most promptly imitated, no business can afford to lag
behind its competitors. The
reputation of a firm depends upon its ability to keep ahead, to be first in the
market with new improvements in its products and new reductions in their
prices.
A hundred years ago it was also argued as a merit of the
patent system that it provided an inducement to inventors to make public the
nature of their inventions so that they would eventually be generally available
for wider exploitation. When
businesses were small, and processes might remain one-man or family affairs,
secrecy and monopoly might indeed persist longer in open competition than under
the patent system, just as it is reputed to do still within the Maskelyne family
of conjurers. But the conditions of
industrial production have changed in this respect. With large-scale manufacture, few
valuable processes can now be conducted on so small a scale that prolonged
secrecy is feasible. Possibly - it
is a question requiring intimate technical experience - there may exist chemical
processes in which the nature of the product defies analysis and reconstruction
of the method of manufacture, and in which the nature and proportions of the
ingredients can effectively be maintained as the secret of a few people; but
such cases, if they indeed exist outside the pages of detective fiction and
sensational literature, must surely be exceptional, and unlikely to be
eradicated by the inducements of temporary patent
protection.
22. Uncertain
Theoretical Basis
If the theoretical basis of the patent system is indeed
as uncertain as this analysis suggests, the actual provisions of patent
legislation cannot but be arbitrary. It is impossible to share Jeremy
Bentham’s enthusiasm. To him “an
exclusive privilege is of all rewards the best proportioned, the most natural,
and the least burthensome.”… “[A patent] unites every property which can
be wished for in a reward. It is
variable, equable, commensurable, characteristic, exemplary, frugal, promotive
of perseverance, subservient to compensation, popular, and revocable.” I propose to refer to a number of
features of the patent system as it exists which are of particular relevance to
the preceding discussion.
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There is first the question of the types of innovation
which are covered by the patent law. A very great deal of invention goes on
outside its range, without any inducement beyond that provided by the operations
of the open market. One need only
point to the so-called fashion trades, in which the rate of invention reaches
probably its highest point, and to the non-patentable refinements and
improvements every day being added to all kinds of industrial product. In the last three hundred years there has
been an enormous amount of litigation in this country concerning the nature of
“a new manufacture.” To the student of economics it makes
instructive reading. “Biological
inventions” - innovations in plant-breeding for the production of special types,
for instance, which are of undoubted economic significance -in the agricultural
and pastoral industries - are excluded. They may be freely adopted by
competitors. Yet they continue to
be made. Medical practitioners,
partly no doubt on account of traditional altruism and partly as the result of
the lead, if not the drive, of their professional associations, make very little
use of the patent laws; and yet the work of medical invention goes on. The whole field of scientific discovery
lies outside the scope of the system, although inventors and manufacturers may
owe the fortunes they have made from patented products in the main to the
workers in pure science whose discoveries they have applied. The task of distinguishing a scientific
discovery from its practical application, which may be patentable - as for
example in the field of wireless - is often baffling to the most subtle lawyer.
Associations of interested and
discontented scientists do not fail to press their claims for inclusion. There are the notorious Ruffini
proposals, for instance, for the grant of monopolies to scientists covering
their published discoveries. Similarly, in the field of minor
industrial inventions, there is strong pressure for an extension of the patent
system, to supplement the registration of designs by a short-period patent
protection of particular arrangements of mechanism, on the lines of the German
Gebrauchsmuster. How can it be
shown that the “patentable” class of innovations possesses so much greater
usefulness than all these others that it should be specially encouraged by
monopoly?
Secondly, there is the system of reward itself. It operates in favour of only one or one
group of the many participants in the progress of an invention from the birth of
the scientific discovery to the emergence of the patent monopoly. The
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scientific discovery itself may be the culmination of
the, research and of the tentative hypotheses of many scientific workers: the
possibility of applying it in a particular device may occur almost
simultaneously to large numbers of industrial technicians; priority in the
formulation of the provisional patent application may be a matter of days or of
minutes. But one application alone
can satisfy the requirement of this man-made law that the patent shall be
granted to “the first inventor,” who receives a monopoly of the use of it for
sixteen years, in this country, with the possibility of an extension for another
ten. The grant of a monopoly
renders almost nugatory the labours of all the rest, for any refinements they
may subsequently invent in this type of device will, if patented, be much
reduced in value by the requirement that acknowledgment shall be made, in the
patent specification, of the prior “invention.” Lotteries in open competition there may
well be; but the lottery of the patent system awards but one prize, and that a
monopoly, while those who subscribe most of its value may be precluded from
qualifying for the prize.
The existence of a monopoly in fact operates to divert
the attention of inventors from what may well be the most fruitful field for
further innovation. In the case of
inventions which cannot be patented, a particularly useful device at once
attracts the attention of other specialists who seek, maybe competitively, to
refine and improve it and to adapt it to the widest possible use. The blocking effects of patent monopolies
check these surely beneficial tendencies; competitors, instead of helping to
improve the best, are compelled in self-preservation to apply themselves to the
devising of alternatives which, though possibly inferior, will circumvent the
patent. It is a particular case,
but one which is very widespread, of the maldistribution of resources which is
consequent upon the existence of monopoly.
The term of the patent grant must inevitably be
arbitrarily determined, even if each invention were separately considered. A fixed period of years for all and
sundry expediently avoids countless difficulties, the range of which may be
gauged from the efforts of the courts to determine, in the case of applications
for extensions, the “nature and merits” of an invention; in order to decide
whether the patentee has been “inadequately remunerated” and the period, if any,
for which an extension shall be granted. Economists will well appreciate why the
Royal Commission of 1862, which included Lord Overstone,
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was strongly opposed to any extensions whatever. Yet if there were a parallel provision,
that any person interested might apply at any time during the life of a patent
for its revocation on the grounds that the patentee was already more than
adequately remunerated, some interesting legislation would certainly ensue, and
the decisions of the Courts, however lacking in principle, might well be
preferable to the existing fixed minimum term.
Special interest attaches to the provisions which have
been gradually inserted in the patent laws during the past hundred years with
the object of mitigating “abuses” of the system, meaning thereby such use of the
monopoly power as appeared obviously in conflict with the general interest.
From the 1840’s, side by side with
the movement for the simplification of the patent law, there continued for a
generation a strong agitation for the abolition of the whole system. It had the support of The Times
and of The Economist. The strong Royal Commission of
1862-4, though precluded by its terms of reference from doing more than
recommend amendments, was clearly opposed to the whole system. Professor Thorold Rogers read two papers
against both patents and copyrights before the British Association in 1864 and
1865; while Members of Parliament and manufacturers carried on a continuous
propaganda. The movement was not
-confined to England; in the late ‘sixties a number of economists in France,
including M. T. N. Benard and Michel Chevalier, wrote against patents; in
Germany, Bismarck attacked the system in 1868 in the North German Federal
Parliament; in Holland, the patent law was repealed in 1869. In
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outside the jurisdiction of the laws of this country.
I propose in the remainder of this
paper to confine myself to two only of the modifications which have been
introduced into the patent legislation of this country, viz, the sections
governing the grant of “compulsory licences” and the more recently
introduced “licences of right.”
Provision has been made for fifty years now for the
grant of compulsory licences in the event of certain allegations, which could be
made by any person interested, being found by the competent tribunal to be true.
From the first, one of the grounds
has been that the patent is not being worked in the
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guiding considerations. The first two are worthy of notice
here:
[Patents and Designs Act, 1907 (as amended) Section
24—(I) (6)]
“(i) he shall, on the one hand, endeavour to secure, the
widest possible user of the invention in the
“(ii) he shall, on the other hand, endeavour to secure
to the patentee the maximum advantage consistent with the invention being worked
by the licensee at a reasonable profit in the
Possibly those responsible for this formula might be
satisfied if the assessor contrived to induce both the full competitive output
and the maximum monopoly profit at the same time.
It is enlightening to examine the extent to which since
1919 the Comptroller has
attempted to interpret these instructions. By the end of 1931, out of less than
fifty applications, many of which were subsequently withdrawn, nine grants were
actually made. Three were however
discharged on appeal, and in the case of the remaining six it appears that it
was not necessary for the Comptroller to fix terms.
The same duty of fixing terms, failing agreement between
the parties, falls upon the Comptroller in the case of Licences of Right. In the same period, 7,533 patents were
endorsed, but in only seventeen cases was an application made for the settlement
of terms. At the end of 1931, three
of these applications had been withdrawn, one was suspended -by request of the
parties, and thirteen were still pending. In no case, therefore, had the
Comptroller been persuaded to attempt the feat of following the instructions of
the Act.
Licences of Right furnish us with an economic curiosity.
The 1919 Act, presumably with the
object of inducing monopolist patentees not to restrict so narrowly the supply
of the invention during the life of the patent, offers the remission of half the
fees subsequently payable to all patentees who request that their patent be
endorsed “Licences of Right,” the effect being that any person may thereafter be
entitled as of right to a licence to use the invention upon terms to be agreed
or settled by the Comptroller. The
large number of endorsements - 7,533 to the end of 1931 - is striking, although
of course a small percentage of the total number of patents in force
during
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the period (about 20,000 new complete specifications
being added each year). The fact
that in all cases the licence fee has been fixed by agreement without recourse
to arbitration by the Comptroller would suggest that the patentee secures a
royalty not far different from that which he believes will adjust the total
output to the amount which maximises his monopoly profit.
If we were to make the assumption that the adjustment of
volume of output to given price conditions takes place promptly, and that
different firms have broadly the same production costs, the position would then
be that the volume of output would remain more or less the same as that which
would emerge under the ordinary patent system, while the patent office would
have forfeited half its revenue to little good purpose, so far as the general
public is concerned. We cannot,
however, assume either that production costs of different firms are identical,
or that a sole licensee will rapidly expand his output and sales to the point of
maximum net revenue. It therefore
appears very probable that the Licence of Right system, by enabling any producer
to try his hand at producing the patented article, facilitates the operation of
competitive forces in concentrating output in the firms which have lowest costs,
and encourages the rapid spreading of production over a number of producers, so
that the aggregate output is in fact increased more rapidly to the point of
maximum monopoly profit (if the patentee fixes his terms to his best advantage)
than would otherwise be likely (if it does not in fact, exceed that amount for a
time, to the loss of certain licensees). This device almost certainly serves to
increase output, for without it the monopolist would probably not as rapidly
decide to grant as many licences to the producers whose costs are
lowest.
Without, therefore, injuring the monopolist’s interest,
so long as licence terms continue to remain at the point he himself selects, the
licence of right system tends to correct one of the practical objections
to the patent system, i.e. the slowness of the expansion of the output of
patented articles. If, therefore,
it could be reasonably assumed that the Comptroller would continue successfully
to evade the alarming task of fixing terms, there would be much to be said in
favour of modifying the patent system so that licences of right became the
normal practice. In the case of
copyright, in which the device was first applied, the problem of terms could be
settled - if crudely - by fixing a royalty of so much per cent of the price of
the book
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or gramophone record or piano-roll as the case might be.
So simple a solution is hardly
applicable to inventions, and if disputes between patentees and licensees became
frequent some other rough-and-ready rule would need to be
devised.
Expedients such as licences of right, nevertheless,
cannot repair the lack of theoretical principle behind the whole patent system.
They can only serve to confine the
evils of monopoly within the limits contemplated by the legislators; and, as I
have endeavoured to show, the science of economics as it stands to-day furnishes
no basis of justification for this enormous experiment in the encouragement of a
particular activity by enabling monopolistic price
control.
There is to-day widespread alarm at that increasingly
rapid rate of obsolescence of industrial equipments which is the reverse aspect
of the quickening of technical progress. Everywhere we encounter the protests of
owners of specialised plant and of specialised workers at -the changes which
convert property and specialised skill into “surplus capacity.” In so far as the new enterprises compete.
for their resources, capital and labour, in open competition with existing
businesses, economists have strong grounds for the presumption that the gains
from their success will outweigh the losses. If, however, innovation is especially
encouraged, to the loss of other production, by monopoly price conditions, is it
not conceivable that there may be relatively “too much invention of the wrong
kind,” and, in consequence, “too much” obsolescence and displacement of
specialised ability? Can it be that
the patent system is in part responsible for our present economic
troubles?
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