Digital Majority

This article is the synopsis of a 1950 article by Machlup and Penrose, "The Patent Controversey in the Nineteenth Century", published in The Journal of Economic History, Vol. 10, No. 1, with additions and commentary by Pieter Hintjens.

On June 5 1869, The Economist wrote, "It is probable enough that the patent laws will be abolished ere long."

The patent debate in the 19th century

In 1872, after thirty years of investigation into the patent system by the UK government, and demands for its abolition from senior politicians and economists, a patent reform bill was passed that reduced patent protection to seven years, forced stricter examination of patents, caused patents to be forfeited if not worked after two years, and forced compulsory licensing of all patents.

Switzerland was, at this time, the only industrial country in Europe that had not adopted a patent system. In 1863, after rejecting four proposals for a patent system, the legislature declared that the principle of patent protection was "pernicious and indefensible".

In the Netherlands, in July 1869 the debate around the workability of the patent laws and the difficulties of reforming them, while keeping all parties happy, ended in the complete repeal of the patent law and the end - for many decades - of the patent system in that country.

In 1873, with a severe depression in Europe and the weakening of the free trade movement, patent advocates were able, with a strong propaganda campaign, to silence their opponents.

The UK withdrew its patent bill in 1874. Germany passed a patent law in 1877. Switzerland held out until 1887¹, after pressure from other countries who branded Switzerland a "pirate nation" and threatened trade sanctions. The Netherlands finally adopted a new patent law only in 1912².

The four arguments for patents

In the nineteenth century, the defenders of the patent system developed four main arguments to justify the creation of patent rights. These have been used for one hundred and fifty years and are still used today by patent attorneys:

1. Calling on natural law. Inventors have a natural right to their ideas and inventions, which like all property must be exclusive. Society must recognize and protect this right.
2. Appealing to fairness. Exclusive rights to an invention are the most appropriate way to reward inventors for their work.
3. Inducement to innovate. Inventors will not invent and capitalists will not invest in new inventions, unless they are given exclusive rights to their inventors.
4. Inducement to disclose. Inventors will not publish their secrets, and thus ideas would be lost to society, unless they are granted exclusive rights to their inventors.

It was the French who first decided that ideas were naturally property³. The French patent law of 1791 said, "that every novel idea whose realization or development can become useful to society belongs primarily to him who conceived it, and that it would be a violation of the rights of man in their very essence if an industrial invention were not regarded as the property of its creator."

While the French raised ideas to the status of private property, and called for them to be granted for ever, and hereditary, in 1863 the Germans dismissed intellectual property as an untenable political fabrication.

The first argument depends on accepting the notion of natural law. Prince-Smith, the leading German free-trade economist said, "Any claim for protection of private property is a demand for the intervention of the power of the state, which should follow exclusively the dictate of common welfare. With regard to property in things the dictate of common welfare is firmly established. How is it with regard to the so-called intellectual property, and above all, patents of invention?"

The use of the word "property" to cover ideas was part of the propaganda war to establish patent laws in France in 1791 and again in 1843. The previous, more accurate term was "exclusive privilege", perhaps not the best thing to discuss after the French Revolution.

By the late 1800's the notion that patents derived from natural property rights in ideas was being heavily attacked, especially in Germany, and we saw the second argument evolve.

The Swiss, stubbornly, did not agree that society had a moral obligation to reward inventors. Others pointed out to theory of social origins of inventions to explain why individual inventors did not deserve rewards. Others argued that real inventors had a head start that should give them enough profits to reward their work.

Even those who agreed that inventors needed rewarding, and that competition might wipe-out any head-start advantage too quickly, did not necessarily support patent privileges. The Economist wrote, "…what the community requires is that inventors be rewarded; that skillful men who contribute to the progress of society be well paid for their exertions. The Patent Laws are supported because it is erroneously supposed that they are the means to this end."

The favorite proposed alternative to patents were bonuses paid to inventors by the state, by industry associations, by intergovernmental agencies, or by international industry associations. The bonus system was dismissed as corruptible and arbitrary, and patents - exclusive privilege - was promoted as the best method of delivering fair rewards to inventors.

Others pointed out that with patents it was impossible to ensure the reward went to the real inventor, that rewards were proportional, and impossible to prevent great damage being done to others by the exclusive privilege.

The visible injustices of the patent system meant that the "society's moral obligation to reward inventors" argument was fairly weak. So, the patent advocates formed the argument that exclusive privilege, fair or unfair, was the best way to stimulate invention.

In the mid-1800's, writers claimed that the industrial progress of England and the United States was due to their patent system. Other writers claimed that the progress of Germany and Switzerland was due to their lack of any patent system. In fact any causal relationship is very hard to prove, or disprove. So the argument that patents promote innovation is mainly a thought exercise and works as follows:

1. Industrial progress is desirable;
2. Invention is a necessary part of industrial progress;
3. Not enough invention will happen unless effective incentives are used;
4. Patents are the cheapest and most effective form of incentive.

There are two straight-forward counter arguments to the last two points. First, that invention will occur with or without legislative interference. Second, that patents are not the best and cheapest form of incentive - that prizes, for example, would work better. Either of these two counter-arguments breaks the whole thesis that patents are necessary to industrial progress.

Economists thus began to debate the costs and benefits of the patent system. Some argued that the costs were zero, and the benefits infinite. Others argued that a heavy social cost was unavoidable and the net benefits were negative.

The costs of the patent system are as follows: first, the cost of diverting one's activity away from patented areas towards other domains; second the bureaucratic cost of administering the patent system; third, the economic cost of monopolies sustained by patents; and last, the cost to those unable to use the most efficient processes.

Thus in 1851 the Economist wrote,

The privileges granted to inventors by patent law are prohibitions on other men, and the history of inventions accordingly teems with accounts of trifling improvements patented, that have put a stop, for a long period, to other similar and much greater improvements… Every patent is a prohibition against improvements in a particular direction, except by the patentee, for a certain number of years; and, however beneficial that may be to him who receives the privilege, the community cannot be benefited by it.

For a while, patent advocates argued that the patent system cost nothing. This argument was shown to be wrong: the patent deprived others of the opportunity to evolve and use the same idea that the patentee had, no matter how much they had already invested in it. Exclusive privilege also derived society of the benefits of wider use of the idea.

Another nail in the "incentive to inventors" argument's coffin was the fact that many inventors were employees, or too poor to exploit their inventions without financial help. Thus the "inventor" was often the financier or patent attorney. So the "incentive to invent" theory also has a variant, which is the "incentive to invest", and these two arguments remain the strongest ones used today.

Modern criticism of the patent system thus focuses on its costs and benefits, and economists are now starting to have the tools to actually measure this empirically, with results that match the logical analyses of the mid-19th century.

One last argument of the patent advocates remains: that exclusive privilege is the best incentive to disclose valuable secrets. Even if inventors worked without other incentives or rewards, without strong incentives for disclosure, said patent advocates, inventors might take valuable secrets to the grave and thus rob society of its general fund of technological knowledge.

The post-revolutionary French patent advocates used this explanation to avoid having to defend patents as privileges. Patents, rather than being a privilege, were the result of an fair bargain between inventors and society.

There were (and still are) four objections to this argument. First, since most ideas develop simultaneously and independently in different places, no single disclosure is worth very much. Second, technological secret are very hard to keep for long in any case. Third, when inventors think they can keep their techniques secret, they will not claim patents at all since competitors will be unable to duplicate the technique. Lastly, the patent system creates a disincentive for inventors to publish their ideas early on, since premature publication can ruin the chances of getting patents. So, rather than promote disclosure, the patent system actually hurts it.

Each of these four counter-arguments was used in the 19th century. The Economist wrote that useful inventions depended not on individuals but on general social progress. Many writers argued that most inventions could not be kept secret for long, so the bargain with society was decidedly unfair. The notion that only a few inventions could be kept secret made the third objection all the stronger - the patent system now protected the otherwise unprotected ideas, and did nothing to prompt disclosure of those which could be kept secret. Prince-Smith wrote if the patent system was abolished then "secret and isolated work on inventions would cease and its place would be taken by a cooperation of all qualified talent" and predicted a meritocracy that looks more or less like today's open source software communities.

Historical perspective

Who won the patent arguments of the 19th century? The patent advocates got their patent laws, with a few exceptions. Protectionism, patents and tariffs beat free trade and competition. By the end of the 19th century, the debate over the patent system had ended. Economists turned to other subjects and what had been conjecture and propaganda became dogma and accepted political fact.

Over the last hundred and fifty years, patent lawyers became the "experts" on the patent system, and the sole guardians of its political basis, its economic rationale, its social reason. Independent economic analysis was largely absent, and discouraged. When the patent system moved into the software world, in the last decades of the twentieth century, the four arguments had become almost uncontroversial. Patents were equated, by politicians, with innovation and economic success.

Some even argued that since patents reflect economic activity, it was important to encourage firms to patent more. The argument that patent numbers demonstrate economic muscle underpins political support for the patent system, which has strongly encouraged this way of thinking.

Since the start of the 21st century, as the patent system expands into areas that were as free of patents as were Switzerland or the Netherlands in the late 19th century, the controversy has once again opened.

Initially, opponents of patents have restricted their focus to the software field, where the effects of patents, as a new phenomenon, create a visible contrast.

However, as software patent proponents bring forward their 19th century arguments once more, this time to defend the expansion of the patent system into the field of software, they may find that this time the arguments do not work against software, and thus start to fail for other areas as well.

Commentary

It may be worth while to spend a few words on the status of the authors. Machlup is famous for the report he wrote in 1958, eight years after this widely-referenced article, to advise the US government on patent policy. It contains the famous phrase: "if we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it."

To a large extent this is the FFII position: the patent system, as it exists in pharmaceutical and other industries, is a fact of life, for good or for bad. But the patent system, as it exists in the software world, is a work in progress, a deliberate and patient construction of the patent industry, and this work is, in the words of Machlup, irresponsible. Up until recently, most of the software world was blissfully ignorant of the patent system, and was remarkable for the speed with which it built private legal systems, communities, and markets, and the efficiency with which it lowered transaction costs, showing how a perfect market in services and knowledge could work.

I'd argue that we owe our current global prosperity to the patent-free efficiency of the software world and the bounty of open and free technologies it produced over the last twenty-five years.

Software patents are often claimed, by patent advocates, to be a fact of life. Live with them, we are told. When we question the legitimacy of this view, we are answered with mystical incantations. Here is a quote from a blog comment by an anonymous patent advocate, discussing UK software patents yesterday: "The invention must lie in the effect, not the computer program, for it to be patentable."

This is of course nonsense. It is the language of a shaman intent on control through confusion. Today's economists, mostly nice people who don't look for fights, seem unable to regain the strength of spirit that let them conduct a thirty-year war against the patent advocates during the 19th century. In 1950 there was a great lack of knowledge of the economics of the patent system, and today there still is. The data is there, but research is actively discouraged. We regularly see economists produce remarkable research on the patent system one year, only to be tamed and silenced the next year. The few independent studies stand out in a mostly empty field.

For 150 years the patent industry has, like an advancing glacier, crushed logic and sense under a massive weight of argumentation built on theory built on assumption built on easy self-interest.

Yet in Europe, at least, the debate is not over, and in the US there is a growing movement that is determined to re-open it. The software world is unlike any other that the patent advocates ever entered. It lives and dies on the purest of economic truths. Patents do not co-exist with open standards or with free and open source software.⁴

As software, especially friction-free FOSS technology based on royalty-free open standards, becomes more and more of an essential resource in modern societies, the impact of the patent system on this new technological domain will become intolerable. The patent system is a political construction, and while it has obviously been tenable for a century and a half, we believe that era is coming to a close.