Stiglitz Explains How Patent Protection Both Slows Growth and Increases Inequality

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Beat the Press/CEPR

Stiglitz Explains How Patent Protection Both Slows Growth and Increases Inequality

Very nice column from one of my favorite Nobel prize winning economists. Stiglitz explains some of the ways in which patent protection impedes growth and increases inequality.

It's great to see Stiglitz raising alternatives to patents for financing research, but I would disagree with the prize for patent buyouts that he proposes as being the best alternative. I have always preferred a system of direct upfront funding, which could be done through private firms operating on long-term contracts. In response to  a number of requests, here is the argument in brief. (Here's a little longer discussion.)

First, I doubt very much that the prizes will typically go to the right person. As we know, and Stiglitz writes in his piece, innovation is inevitably a cumulative process. If we allow people to get patents and then have them bought up for a prize and put in the public domain, I have little confidence that we will typically give our prize to the person or company that had the key innovation. There may well be a situation where a great innovation brought research 99 percent of the way to the final product, but the main innovator was blind to the last simple step. A patent buyout system is likely to reward the last simple step, not the innovation that got us 99 percent of the way there.

I am well aware of the ideology that says we have to be able to find the "best" innovator, but this is just an ideology. Years ago when I was teaching, we had a small prize that went to the best undergrad econ major. Half of the faculty had one student who they considered outstanding, the other half had another student. There was no one who had both students. For some reason the prize could not be shared.

I proposed flipping a coin. Everyone laughed assuming that this was a joke. When I insisted that I was serious and that we had no rational basis for resolving this through discussion, my friends on the faculty politely dismissed my suggestion implying that it was close to crazy. Eventually, the louder voices got their candidate the prize.

This was a simple case, but that is the way it works all the time in the real world. Do we really think that it's important we hand large prizes (e.g. billions or tens of billions of dollars) to a person or company who we will credit with an innovation for which they may not deserve credit?

The other problem with a prize system is that it encourages secrecy in the research process before the prize is awarded. In order to have the best claim to getting a prize, researchers would not share their results until they have a patentable product. This could lead to much duplicative research and many pointless deadends. By contrast, if a condition of getting upfront funding is that all research results are made public as soon as practical then research should be able to advance far more quickly.

We could still have prizes in this system, but they would be secondary compensation like Professor Stiglitz's Nobel Prize. While I'm sure Stiglitz was happy to pocket a million plus dollar prize, he had already been paid for his work. Even if the Nobel committee had overlooked his contributions to economics, he need not have worried about going home without a paycheck.

Similarly, in a system of publicly funded research there is no reason not to include funding for many Nobel-type prizes. If someone has a great breakthrough in the treatment of cancer, malaria, or some other major disease, why not give this person $5 million or $10 million? But the point would be that their paycheck would not hinge on having a patent that the prize committee would then decide was worth some vast sum.

Anyhow, that's my two cents on the topic, but the key point is that we need to have the discussion. The abuses of the patent system are a daily occurance. They cost lives, slow growth, and increase inequality. It's great that Stiglitz has raised the topic and that the NYT has run his piece.

Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.

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