Patently Expensive

There's no doubt that Patents and other Intellectual Property (IP) laws have benefits. Benefits often have associated costs and the current IP regime is no exception. If associated costs exceed the benefit then the benefit isn't worth it. In other words, if you incur $1,000 of cost to derive $10 of benefits, you'd be better off not spending the $1,000 and foregoing the $10 of benefits. Let's consider some of the costs of patents in ascending order.

The Patent and Trademark Office (PTO) has a budget a bit under $2 billion. Chickenfeed.

There are almost 1/2 million patents filed every year now. I know my company's have averaged around $20,000 in legal fees and probably another $5,000 in internal engineering costs to file. I've also seen the $20,000 number batted about as a typical cost for filing and processing a patent in the United States. That'd work out to about $10 billion a year. Still chump change relative to the size of our economy.

People with patents are forever suing those they think are infringing their patents (that is, of course, the whole point of getting a patent). I've been unable to find any statistics on the annual aggregate cost of patent litigation, but I'm guessing it's somewhere in the tens of billions of dollars. Still less than 1% of GDP.

Monopoly rents is trickier. The actual increase in the cost of a product because of patent protection doesn't actually cost the economy anything as a whole. It only tends to shift wealth and income to businessmen, inventors and lawyers from others, but is otherwise cost neutral as far as direct effects are concerned.

Where the monopoly is devastating is in suppressing the innovation that comes from competition. Microsoft is a good example of this, even though they are admirably restrained when it comes to wielding patents as a weapon. There software is kinda crappy specifically because they have very limited competition in the desktop market. If Apple hadn't fallen apart and had gone head-to-head with Microsoft for longer, Microsoft's software would have been far better and we all would've benefited, in my opinion.

So what's the cost of this innovation suppression? Nobody knows. I think it's huge because one relatively small group effectively shuts down innovation in the entire rest of the population for each product area protected by patents. In the area of Open Source Software we see the benefit of thousands of pairs of eyes looking at problems, fixing them, and innovating further. Monopolies preclude that sort of interaction.

Lastly, the biggest cost, in my opinion, is the mine field created by patents. There's all kinds of areas in robotics that my company won't touch because there are patents that make it too difficult. Worse still, nobody else, including the patent holders, are bothering to pursue these areas. As a result, there are many technologies that lie dormant for decades while time slowly defuses the patent minefields.

Since humans are naturally creative, there's no doubt in my mind that patents stifle creativity overall. Whether or not patents enable capital aggregation to implement the creativity that's left will be the topic of another post.