This is a link post for: https://blog.withedge.com/p/why-patents-history-progress-innovation

“An embarrassment.”

That is what Thomas Jefferson, the Founding Father of the United States and the first patent examiner in the nation’s history, had to say about patents.

“An embarrassment.”

In 1999, Amazon received a patent for its one-click checkout system. It used that patent to get an injunction to shut down Barnes and Noble’s website just in time for the shopping season.

The case was notorious. Paul Graham, co-founder of Y Combinator, even asked in an essay, “Are patents evil?”

Historically, the opponents of patents have been legion. Aristotle himself rejected the idea of patents when it was proposed by Hippodamus of Miletos, fearing that it would cause a scarcity of goods. In the 19th century, there was even a coordinated campaign to eliminate the patent system supported by Otto van Bismarck.

“An embarrassment.”

And yet.

Despite the fact that patents have always faced opposition, they are largely the same as they were when the Venetians first devised them in 1474—“patents for invention,” they called them. Jefferson himself, who called feared the monopoly of patents, eventually came around, so much so that he helped author the Patent Act of 1790 alongside John Ruggles. Jefferson even came to call patents a “gift of social law” that “caused a spring of invention.”

And it is quite notable that the creation of patents coincided with some of the greatest bursts of progress in human history. They were born during the Renaissance and bloomed during the Industrial Revolution. Correlation isn’t causation, but perhaps where there’s smoke there’s fire.

Patents are a source of public fascination and controversy. There are even websites that track the patents of famous companies to try and divine their plans.

And yet, the effects of patents on society are poorly understood. Though many people have convictions, few have the evidence to back them up, even patent practitioner defenders of the system.

Let’s dive deep into patents: the history and the evidence.

A Quick Primer on the Birth of Patents

Patents, as we understand them, come from the Venetian Patent Statute of 1474. It is the first known patent law anywhere in the world.¹ Its purpose was to incentivize inventors to “exert their minds, invent and make things which would be of no small utility and benefit.” In exchange for disclosing a new innovation to the public, one would be entitled to ten years of monopoly protection. The key is that these “statutory” patents were granted for any technological “contrivance” by a neutral body of expertise, the Provveditori di Comun. The requirements for a patent were strikingly similar to the requirements we have today: the inventions must be “ingenious,” “not made heretofore in our dominion,” and “reduced to perfection,” mirroring utility, novelty, and reduction to practice.

The Patent Statute put individual at the center of the reward system, not the guilds, because the rewards flowed directly to the inventor and did not require guild approval to acquire. Anyone who infringed on a patent would not only have to pay a steep fine of 100 ducats and have their infringing product destroyed. Moving patents to a technocratic body also reduced the politics of patenting, though the Provveditori was still discretionary.² The Venetian patent system was a success, awarding 2000 patents over 314 years. Venetians traveled the world and demanded the same protections they had at home, and invariably they got it. In fact, the first French patent, granted in 1551, was granted to a Venetian-turned-Frenchman!³

The patent system as we know it today, however, was incubated in the United States. Patents are fundamental to American governance—in fact, before the Bill of Rights, the patenting right was the only right recognized by the United States Constitution. The Patent Act of 1790, written by John Ruggles, was one of the first laws ever passed by Congress (specifically, it was H.R. 41!).⁴ The value of intellectual property to society, according to Federalist Paper No. 43, was so obvious that “utility of this power will scarcely be questioned.” Its purpose, unlike the Venice Patent statute, was not getting inventors to “exert their minds” but rather a commercial purpose, the “promotion of the useful arts.”

As such, the major innovation in the United States patent regime was the recognition of patent rights as property rights and thus subject to the rule of law. Colonial governments sometimes had compulsory use or licensing requirements; the American patent system didn’t. Unlike English patents, which didn’t even involve a review of whether the patent worked, the U.S. patent system granted intellectual property rights as long as the conditions were met⁵ and treated the enforcement of those rights as a matter of grave importance. As a consequence, inventors gained for the first time the exclusive right to license their invention, or “vending to others to be used.” This lead to the creation of a vast secondary market. By the nineteenth century, there was already a robust history of licensing and secondary patent sales. And because the patent system was subject to the rule of law, even the President had to license a duly issued patent; President George Washington himself licensed a patent from Oliver Evans for a gristmill on Mount Vernon.

The modern patent system, of course, has seen changes and improvements. But by and large, the patent system has a lot in common with what one would recognize in 1790 and even 1474.

The Verdict: How do patents impact innovation?

The question remains: did the patent system proliferate because it worked, or just because Venetians demanded them? And is there support more for the Venetian vision of patents of encouraging innovation itself or the American one of facilitating commercial value? Let’s review the evidence that patents help advance progress.

The skepticism surrounding the utility of patents was most famously argued by W.H. Price in a 1906 book rejecting the theory that patents were a major factor in the Industrial Revolution for the simple reason that many important inventions of the Industrial Revolution were not patented. Most critiques today follow this line of reasoning. Many have remarked that inventors primarily invent as a matter of personality, like how artists make art as a means of self expression; others have argued that patents restrict invention and slow things down. These arguments all lack quantitative evidence, however.

The primary argument for the patent system is that it incentivizes investment in innovation for the economy as a whole rather than to incentivize any particular invention per se. As Simon Rifkind, the Co-Chairman of the 1967 United States President’s Commission on the Patent put it, “the patent system is more essential to getting together the risk capital which it required to exploit and to develop and to apply the contributions of the genius inventor than to provide a stimulus for the actual mental contribution.”

The question, then, is whether patents are associated (1) with more inventing activity overall, and (2) with more productive uses of the inventions once they are invented. In economic terms, we are more looking for evidence that patents facilitate capital formation and technology diffusion, both of which are well-studied and associated with economic growth.

There are now a few recent quantitative studies on the matter, most notably causal research that patents help with capital formation on a firm-wide level. The first study was NYU’s Deepak Hegde’s breakthrough paper, which found that companies with patents grew 80% faster over five years. A study in the European Union similarly found that that startups there with patents were 6.4 times more likely to raise a round of institutional venture capital and were 2.1 times more likely to be acquired and 3.5 times more likely to IPO at a 2.4-3.2 times higher valuation.

Quantitative studies focusing on the economy as a whole, though rarer, have similarly found that patents are associated with positive GDP growth and technology diffusion. There is also evidence that patents diffuse technology, with economists diverse settings from Swedish international trade to the energy industry finding evidence that patents facilitate technology diffusion. Old Venetian patenting activity shows a democratizing effect, since foreigners and those with fewer connections to powerful guilds were the most likely to file.

This mirrors one of the justifications John Ruggles would later proffer for patents: that they be “accessible to inventors of the most moderate fortunes.” There are numerous examples of this effect, most studiously assembled by Adam Mossoff of George Mason University, including Samuel Morse and Charles Goodyear. Even Thomas Edison licensed his patents early on in his career to fund his research—in other words, no patent licensing, no light bulb.

That said, there is evidence of negative costs from patents, primarily focused on patent trolls. One paper found that non-practicing entities, or NPEs, act like patent trolls. Those trolls, by one estimate, cost $29 billion to the economy per year. They also absorb a great amount of judicial time, with patent trolls filing, at the high end, an estimated 60% of all patent litigation. And patent litigation as a whole was once estimated to cost the economy over $60 billion per year; similarly, there is some evidence that blocking patents in a target country can negatively affect international trade. Most interestingly, one group of researchers has also suggested that patents can cause more harm for standard essential technologies like the transistor, suggesting that F/RAND incentives for certain types of technologies may be beneficial for growth. That said, many of the problems with patents are policy choices, like venue choice rules, so improvements have been made: the American Invents Act, the TC Heartlandcase, and more.

Patents involve the granting of a monopoly right, which is a potentially dangerous thing,⁶ so some economists like Nobel Prize winner Joseph Stiglitz have proposed prizes instead or perhaps some mix of the two. But prizes have been tried for centuries with mixed results. The Venetian guilds actually had prizes for artistic achievements and inventions, as did Dutch shipbuilding guilds, but the prizes were ineffective enough that the Dutch also had to impose compulsory disclosure enforced by punishment. The most important issue with prizes is that they require the prize committee to know ahead of time which inventions are worth pursuing, while with a patent system the inventors come to you, which also helps avoid adverse selection. We still have prizes, like the Nobel Prize and the Macarthur Grant, and more basic research is often incentivized by grants, most notably the National Institute of Health/National Science Foundation, but even those institutions have been accused of being too conformist and becoming too conservative. Patents are also not equally useful in all fields, and for those, trade secret was the norm. Even the Venetians, who invented patents, used trade secret for glass making techniques and used assassins to kill those accused of leaks.

It is difficult to argue that patents are the only way to fund innovation, and it would be foolish to say that they are always the best choice. But the evidence of alternative methods seems to strongly show that patents are a key piece of the puzzle. Indeed, a 1958 Congressional report by economist Fritz Machlup found that although the patent system is not perfect, there were no good alternatives.

So, seriously, why patents?

Patents appeared around the time that society started getting really technically innovative, and reviewing the evidence, it does seem like it was no accident.

Patents are fundamentally a social innovation. They encourage inventors as a class to reveal their inventions and productize them to the world while allowing them to protect their ideas. They are not a cure-all, but they aren’t the stifling restrictionist tools that some depict them as either. In fact, the evidence available supports the American conception of patents, not the Venetian one: the benefit society comes primarily by supporting the commercial application of technology.

The bottom line is that patents are one of the key ways we incentivize innovation in a systematic way, and that some of those incentives need to extend to the realm of commercialization in order to encourage inventors to do more than just invent in a basement. After all, technology that nobody uses is just an idea.

Footnotes

1

In fact, as with many things, there is some evidence that there were earlier examples of something that looks like patents in other places and times that fell far short of a true patent system. The Kingdom of Jerusalem of the First Crusades seems to have had patents in place for silk makers, while Ancient Greek city of Sybaris seems to have had patents for innovative food dishes (which, ironically, you cannot patent today) and the English granted a patent in 1449 to John Utynam for making stained glass. And, of course, there is the patent for Filippo Brunelleschi, the famed Florentine architect. China had a somewhat unique system where skilled silk weavers and other craftspeople would gain the title “majesty’s supplier and vassal” in exchange for only producing crafts for the emperor. The fact that we have found these few isolated examples suggests that there are likely many more that we just have not yet discovered, and that like many forms of governance the basic logic runs deep into our history, and indeed one scholar argued that the Venetian statute may have been inspired by other societies like Cairo and Damascus. Yet the fact that these few examples are so sporadic in nature, and that they were rarely so important as to memorialize in writing, suggests that it is likely true that the Venetians had the first systematic patent system.

2

In fact, recent scholarship has shown that by the time of the Patent Statute, Venice had already been granting patents for half a century, but requiring a specific entreaty to the Doge’s counsel or a specific law passed by the Senate. The first known Venetian patent, granted in 1416, was passed in this way. This is similar to the process through which Florence granted a patent in 1421 to Filippo Brunelleschi, which suggests that perhaps this was a customary practice in Italy more broadly.

3

The English experience with patents is particularly odd. England had a patent-like system that went back to medieval times called “royal grants in letters patent,” but they had an unusual quality: they were monopoly rights sold by the King not for new inventions but for industries brought to England, often from other lands. This patent right was granted purely at the pleasure of the Crown and so it was ripely abused, most notably in 1601 when one particularly egregious patent was granted to Edward Darcy for playing cards by Queen Elizabeth I. Patent fees, called “rents,” were determined arbitrarily, and were quite expensive, plus the Crown could always use anything patented for free. Venetian “patents for discovery” eventually came to the English patent system, though in a roundabout wayand with such debate that they led to the Statute on Monopolies. The English put on their own twists, many of which are still with us today. The bar against patenting natural phenomena is an English concept from the Industrial Revolution. Also, as inventions became more complex, the English also introduced a more detailed disclosure requirement, which was formalized in Liardet v. Johnson (1778) and includes the first detailed patent drawing, the Puckle auto cannon from 1718.

4

Eventually, John Ruggles would introduce the Patent Act of 1836, which created USPTO. He is considered the “father of the patent office.”

5

Technically, the certification requirement was formally added by the Patent Act of 1836. Thomas Jefferson tried to certify every patent by himself, but it was initially unworkable due to the scale of invention until the creation of a dedicated patent office. This led to a number of important innovations, like UPC codes (now replaced by CPC codes), all spearheaded by John Ruggles. However, before the creation of USPTO, patents were processed haphazardly. The first patents were reviewed personally by then-Secretary of State Thomas Jefferson and signed by President George Washington.

6

In fact, some libertarians even argue that intellectual property rights are illegitimate.