By David R. Henderson
The economic justification for patents is straightforward. If there were no patents, then someone who invested time and money to create an invention would not necessarily get a return on even a very valuable invention. The reason is that others could imitate his or her invention. If imitators have the same production costs as the inventor, they could compete the price down so that the original inventor covers only production costs, but not invention costs. Potential inventors, knowing this, would be less likely to invest in inventing. But with a patent system in place, potential inventors are more likely to invest because they can expect to have a monopoly on their inventions for as long as seventeen years.
Although this argument is airtight, it is, in itself, an insufficient argument for patents. There are two main reasons.
First, there is a cost to the patent system. By creating a monopoly, it causes higher prices for consumers and thus a loss to them that outweighs the gain to producers (see Monopoly). One might argue that the loss is fictitious because without the patent the invention would not have been made. But many inventions would be made and have been made without patents. Sometimes such inventions occur intentionally, such as when the inventor thinks he can keep the invention secret long enough (but typically much less than seventeen years) to collect a monopoly return on it. Other times, the inventions occur by accident. Either way, one of the patent system’s negative effects is to create monopolies in inventions that would have existed anyway.
Second, as British economist Arnold Plant argued in the thirties, the patent system diverts creative energy into the patentable inventions and away from the kinds of improvements that cannot be patented. An example of such an unpatentable improvement would be a new way of organizing shelf space in a supermarket. There is no assurance that this diversion creates net economic benefits for society.
One argument against patents, at one time thought to have merit, has been shown to be bogus. This is the argument that a monopolist who gets a patent on an improved product that costs no more to produce than his or her existing product would suppress it rather than use it. By so doing, goes the argument, the monopolist would avoid destroying the market for his current product. This idea has been so commonly held by non-economists that it is the premise of a 1952 Alec Guinness comedy, The Man in the White Suit, and a more sinister 1980 movie titled The Formula. In the former a perpetually durable suit is suppressed, and in the latter a formula for synthetic fuel is suppressed. UCLA economist Jack Hirshleifer has shown that a rational monopolist would not suppress such inventions.
Consider, says Hirshleifer, a monopolist of light bulbs. He or she acquires the patent to a new light bulb that gives twice as many hours of use as his current bulbs, but that costs the same to produce. Hirshleifer points out that what the monopolist’s customers care about is light hours. So, argues Hirshleifer, the monopolist could sell the same number of light hours at the same price per light hour by producing half as many as the new light bulbs as he or she was producing of the old ones, and charging twice the price. The monopolist would then earn the same revenue, but costs would be cut in half. Bottom line: higher profits from using the invention.
David R. Henderson is the editor of this encyclopedia. He is a research fellow with Stanford’s Hoover Institution and an associate professor of economics at the Naval Postgraduate School in Monterey, California. He was formerly a senior economist with the President’s Council of Economic Advisers.
Hirshleifer, Jack. “Suppression of Inventions.” Journal of Political Economy 79 (March/April 1971): 382-83.
Machlup, Fritz. “Patents.” In International Encyclopedia of the Social Sciences, vol. 11, edited by David L. Sills. 1968.
Plant, Arnold. “The Economic Theory Concerning Patents for Inventions.” Economica 1 (February 1934): 30-51.
Stigler, George J. “A Note on Patents.” In Stigler. The Organization of Industry, chap. 11. 1968.
Lisa Cook on Racism, Patents, and Black Entrepreneurship, EconTalk, September 21, 2020.
Richard Epstein on Property Rights and Drug Patents, EconTalk, February 19, 2007.
Boldrin on Intellectual Property, EconTalk, May 18, 2009.
Morgan Rose, Patent Law and the War on Good Drugs, Econlib, November 2001.
Stan Liebowitz, Intellectual Property, in the Concise Encyclopedia of Economics.