This is a re-blog of my wordpress blog http://diomavro.wordpress.com/, but I thought it would be relevant to giantbomb(since we talk about piracy) :

It’s easy to think that industries can’t work without patents, and this is very true to some extent. Biotechnology is very reliant on patents, in fact they are making a loss year in and year out hoping to survive until that patent gets accepted. But this is a static view of the world; let’s take a moment to consider how the world would look without these patents. To be sure demand for medicine and this kind of research would still remain and as long as demand remains, then there will be solutions. Maybe the political process will create funding for such projects, though that would probably not be very efficient. So how can the private sector profit without patents? How do other industries which don’t have the luxury of patents/IP(intellectual property) property do this? Let’s start with the latter question.

If a fashion designer comes up with a great new style of dressing, but can’t patent it and the next day all others do something similar what has he gained? Well reputation of course. Monetizing reputation is then easy; this fashion designer will be the first to be called by people who want something designed. Or if he has a certain brand or logo associated with him, it will signal competency to the consumer boosting his sales. This same process is also present in finance, most notably, investment banking, one bank invents(or finds) a market, then, the other’s join in, nobody can claim that investment banks don’t have the incentive to innovate, in fact most of the media coverage suggests they innovate in excess. Part of what allows them to thrive is this lack of patents, which allows instant liquidity through the duplication of products. Reputation actually works surprisingly like patents; they give you a great name (which you can use to profit) but fade with time. I’m sure it’s no surprise to anybody that having a good reputation allows a company to charge a premium for its products and if no premium is charged then they have an advantage over equally priced competitors.

Music is to me is the industry which is most undeserving of IP. US copyright protection is active until 70 years after the author’s death! Not only does protecting music not produce better music(no surprise since it’s an art and not a science) but the structure of IP law doesn’t even take into account how the market works. Most of the profits of music are usually made within 10 years of release so protecting it for another century seems kind of insane. Especially if you wish to use an extract from one of these artists after he dies, you have to be chasing down his heirs (who could be anywhere) to ask for permissions.

The theory described above is probably the easiest to prove in the music industry. Artists can improve their reputation by releasing popular music (which can be done with almost no cost, thanks to peer to peer sharing) and can then monetize it by using their reputation, perhaps to advertise or in concerts. The greater their reputation the higher they can charge for their concerts, and the more money they can get from advertising. Businesses (like movie studios) may also wish to contract them to create music for them. It’s hard to make a statement that is “ceteris paribus”(all things being equal) consistent, but since illegal pirating has commenced, I would say music has grown much more popular, there are more artists today than there have ever been. This is in fact partly helped by youtube (an example of how artists can make money without IP) but this was the case before youtube ever started. There is no doubt in my mind that more pirating of a given artists music, boosts his concert sales. Perhaps the most frustrating thing the about the music industry is that they are crippling peer to peer networking technologies which have very high potential welfare benefits for the everyday consumer.

So now to the real challenge, how would pharmaceuticals get developed? Well in a very similar way really, though the industry probably own a lot more hospitals. So a pharmaceutical firm develops something spectacular, let’s say they cure aids. Then their brand value will rise and their hospitals will be more popular because their doctors there will be perceived to be the best in class. Even without hospitals, their medicines would become more popular due to the prestige associated with their brand. There is still an incentive to create these products, in fact the incentive to innovate is strengthened like never before, since there is no chance to sit back and relax through rent seeking (royalties), you must now always be one step ahead of your competitors, you are forced to keep innovating, cure cancer, Alzheimer’s, death, etc.

You’ve got to remember that IP at the end of the day makes things much more expensive, and could bring things out of reach of certain people in the world. Although it might not be a big loss for people on the music end, it holds back the private sector from being able to distribute innovative medicinal practices to people all over the world. If a firm develops a technology, it is under no real pressure to start distributing it, since it can just sit back and claim royalties from others who wish to do the dirty work. However those others will have to overcharge for the product and will probably not have much incentive to do this. Whilst in a world with no patents, it’s in the pharmaceutical companies every incentive to make sure that it sells it to all the markets that could use it before anyone else. What’s their incentive to do this fast if they have 20 years until the patent expires? Let’s not restrict competition, whoever can save the most people first, wins.

So now with the big boy of patents tackled, let’s go down to some chumps. Whilst the pharmaceutical industry is extreme in that the ratio of cost to create to the cost of copying is very high there are other industries which file thousands of patents without this ratio. One most extreme example is the software industry, most software innovation is incremental, created by teams of software engineers at very modest costs, worse yet most of these technologies quickly become obsolete. Each device (laptop, phone, etc) could potentially have hundreds of thousands of patents. We saw this summer how apple won a case over having rounded edges on smartphones. This creates endless opportunity to hamstring competitors.

In practice of course all these processes are very costly to our economy; we produce lots and lots of lawyers to protect these patents. Patents increase the prices of goods, they allocate resources to patent races(which is not a good competitive trait to base competition on, see my other post), there is a cost of having to look through the Patent and Trademark office every time you do something, there is of course a lot of filing of defensive patents, which are patents which won’t necessarily yield royalties but they are there because you are scared someone else will file it, and of course patents give birth to patent rent seekers who buy large number of patents and only make money through fees and if necessary by suing . It seems obvious to me that if we had less lawyers taking care of this stuff, the innovation process would be much quicker, not to mention that the lawyers might maybe join a profession that actually directly helps competitiveness(and not by cutting off opponents feet). Let’s also not forget that we as tax payers generally have to pay to keep these(e.g patent office) public institutions running.

In law “fair use” is a defence allowing for copying of short excerpts from a copyrighted work without a license. The rationale for this is that the transaction cost of negotiating a license for these is likely to exceed the value of the license. Yet even this law that has potential for being economically rational is so ill defined that the copyright owners can bring down this “short” phrasing to its bare minimum, for instance film studios insist that even a minute of their film is too much. Innovation comes in many forms, yet the most common is not the popularized “radical” but the “incremental” one. The lack of fair use objectivity in law is very damaging to the latter.

One of the most vital advantages of the Chinese economy is in fact this lack of respect for patents, it allows their firms to have much lower costs of production, and this cannot be duplicated in the west because we fear the courts reining in on us. In fact in developing countries there is a reluctance to file patents, since it is in essence just telling your competitors your recipe. Another well documented global phenomenon is that patents cause inequality in society, a fact proven by academics that should not really surprise anyone.

Some inventions are not patentable and could be just as valuable to society but having patent systems is like funneling innovation to only occur in areas which are patented. For instance, the theory of relativity could not be patented, same for the theory of evolution, and our understanding of DNA and more recently the Higgs Boson breakthrough. Patenting funnels our scientists to areas that can be patented rather than on pure scientific research(which might have much more productive output in the long run).

A video game called lord of the rings online, was initially a product you paid for, and once sales started dropping the owners made it free to play (making money through in game purchasing), and the game saw its profitability rise higher than ever before not to mention a much bigger player base (which will likely be beneficial on the next release of this company). This is an example how the private sector can build models based around other ways of making profit. If every purchase gets duplicated by the net, then in the future we might see consumers cooperate to see products see the light of day, this is perhaps what kickstarter is accomplishing, if you expect that after the release the whole world will be playing your game and you’re not too sure about making a in-game profit system then you can just put your projects on kickstarter and wait for consumers to cooperate and give you funding for it.

We need to call out things by their real names, so what is a patent? It’s very simple, it’s a monopoly. In short I would not call for elimination for the whole patent system; I am not that extreme (though I obviously understand where that argument would come from). I would however wish for patents to end for all products except drugs and maybe some other expensive but easy to copy technology (emphasis on the maybe), this moderate stance is only because I’m afraid to meddle with a chicken that lays golden eggs (medicine).

Open source movement have definitely shown me that people will create not only for money but because they love creating, it’s self-fulfilling (an opinion shared by Akira Kurosawa in Ikiru). The private enterprise is resilient enough to find ways to satisfy demand without such artificial methods. Government intervention should be done when systemic and chronic market failures exist, these conditions are not met in our world as far as patents and IP are concerned.