Walter Eucken on patent laws: are patents just ‘Nonsense upon stilts’?
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Abstract
As recent newspaper headlines show the topic of patents/patent laws is still heavily disputed. In this paper I will approach this topic from a theoretical-historical and history of economic thought – perspective. In this regard I will link the patent controversy of the nineteenth century with Walter Eucken’s Ordoliberalism – a German version of neoliberalism.
My paper is structured as follows: The second chapter provides the reader with a historical introduction. At the heart of this paragraph are the controversy and discourse on patent laws in nineteenth century Europe as well as the pro and contra arguments presented by the anti-patent/free-trade movement respectively by the advocates of patent protection. The focus of my paper is on the struggle for the protection of inventions and innovations in nineteenth century Germany, since Walter Eucken, main representative of the Freiburg School of Law and Economics, picks up the counter-arguments presented in the national debate and in particular by the Kongress deutscher Volkswirthe. The third chapter deals intensively with the question whether patent laws are just ‘nonsense upon stilts’ from an ordoliberal perspective. Here, Eucken’s arguments against the current patent system are elaborated in great detail. The paper ends with a summary of my main findings.
This is a very interesting paper that traces the evolution of the debate in favor of and against the patent system. The author states correctly that many of the arguments used in the XIXth century for and against patents are still raging today. The central issue in the paper is a contradiction between, on one side, the notion that free markets bring about prosperity, and on the other, the idea that a monopoly, such as the one conferred by a patent, is a crucial factor to attain that prosperity. It would be interesting to develop this point further from the perspective of German Ordoliberalism as noted by the author.
Both the time period and the geographical locus covered in the first half of the paper are highly relevant. This is a critical moment in the history of patent legislation: it corresponds to the period leading to the negotiations and the signing of the Paris Convention for the Protection of Intellectual Property. The demise of the anti-patent feelings in Germany is analyzed and related to the economic crisis of 1873 and the emergence of the German Reich as an industrial power (especially due to the industries in the Rhineland).
In terms of neoclassical economic theory the contradiction appears clearly when one observes that monopolies lead to losses in consumers’ welfare. A monopoly conferred by a patent need not be different from this. The contradiction is resolved by assuming that all welfare losses are inferior to the gains for society as a whole deriving from the productive use of the inventions ‘protected’ by patents, as well as by the incentive to generate further innovations. These assumptions are surrounded by intense debate.
The paper states that “[r]emarkably, most of the arguments presented here defending or opposing patents are still used today whenever the meaning and significance of patent laws is debated. Thus, the patent controversy of the nineteenth century and the (counter) arguments presented by Eucken are still relevant in the present context”. However, the paper only devotes a footnote to explore some of the questions surrounding the debate on patents today.
It would indeed be enlightening to examine in what ways the debates in the XIXth century, as well as in the first half of the XXth century, are relevant to today’s discussion on the role of patents. The rich archival work in the paper could be the source of important insights.
In the nineteenth century the opposition to the patent system came from free traders, while protectionists favoured the establishment of the patent system. Today the terms of this equation have been reversed. Today’s free traders (in the extreme version, neoliberals) are entirely in favour of very strong patent protection (wide coverage of patents and long patent life), while economists favoring protectionism reject strong patent systems and favor, instead, industrial and technological policies in order to acquire technological capabilities. The paper does not address this reversal directly as it concentrates on the historical aspects of these debates.
These questions have become more pertinent now that the standards for patent protection have been extended worldwide. By pushing forward the Agreement on Trade-related aspects of Intellectual Property (TRIPs) within the framework of the World Trade Organization, neoliberalism effectively extended the role of patents (and trademarks) to increase market concentration and market power. Patents stopped being the realm of lawyers and became the affair of economists. Patent protection was enhanced, patents’ lifetime was increased and the whole patent system was endowed with new teeth through the countervailing measures that are the core of the WTO regime. All of this had very important effects in branches such as the pharmaceutical industry, with wide implications for public health policies in developing countries. The strengthening of the patent system was carried out in complete disregard to the contradiction between patents and the neoliberal doctrine about free competition.
There are several issues related to patents that are clearly related to the crucial question of whether or not patents are “nonsense upon stilts”.
First, what are patents really for? Does the patent system really serve to foster or promote technical innovation? The paper mentions the common arguments, but does not attempt to provide an answer. Today there is ample evidence that a significant proportion (in many industries a majority) of new patents simply cover minor or marginal innovations. In many cases the innovation is simply a cosmetic innovation that differentiates a product without adding new medical properties. This is particularly evident in the pharmaceutical industry, where so-called “me-too” drugs are the source of a constant flow of patents. There is evidence that current patent legislation may be inhibiting true innovations because of the incentive to concentrate on the easy marginal innovations.
From an industrial organization perspective there are indications that patents have a different role, namely to extend monopoly rents through the segmentation of markets and also through setting the groundwork for mergers and acquisitions in which patents are intangible assets. Thus patents are more related to the quest for extending monopoly rents given the difficulties experienced in the real sectors of the economy during the past three or four decades.
Second, there is an additional problem related to the question of disclosure. The idea that is used to justify the role of patents is that only after disclosure is the inventor rewarded with the (temporary) monopoly powers granted by patents. But there is evidence that in many cases patents do not really engage in full disclosure of the technology covered by them. Thus, among patent attorneys we find references to the “art of non-disclosure”. In these cases, patents are a scam and the benefit of a temporary monopoly finds no counterpart in terms of increasing welfare for society.
Third, why do patents cover inventions that are not exploited or taken to actual production? This fact appears to knock down the argument that patents promote innovation and production. There are patenting strategies that are carefully crafted so as to impede patent infringement: the core patents are protected by layers of secondary or cosmetic patents that make it virtually impossible to copy the central or core technology. This explains why the majority of ‘innovations’ covered by patents never find application through commercial production.
Fourth, here now appears to be a rupture in the patent system by the blurring of the distinction between innovation/invention, on one hand, and discovery on the other hand. Here the patent system’s original objectives are degraded because the original criteria had a different base. In theory, patents are based on three requisites: novelty (the innovation is not in the public domain), inventive activity (the step leading to the innovation should not be obvious to a person well versed in the corresponding field), and utility. By establishing the possibility of patenting genes and gene manipulation, as in Diamond v. Chakrabarty, the US Supeme Court back in 1982 opened the door to the blurring of this crucial difference. This is especially important in the so-called life-sciences. I wonder what Walter Eucken would say about this.
Fifth, licensing agreements are laden with restrictive clauses that extend the power conferred by patents to other dimensions of productive and commercial activities. For example, export restrictions, prohibitions to carry out adaptions, obligation to purchase inputs from patent owner, etc. One critical issue in this context is how this leads to greater concentration and, as we pointed out before, to the extension of monopoly rents.
I understand objective of this very interesting paper is to throw light on the controversy on patents in the XIXth and XXth centuries. By expounding Eucken’s thoughts and the debate between German Ordoliberalism and the rise of the protectionist school, the paper makes an important contribution. It would be interesting to see what the author has to say about these more recent developments in the evolution of the global patent system.
Dear Alejandro,
first of all I’d like to take the opportunity to thank you for your constructive criticism. Almost all of your points deserve further investigation and are of great importance for improving the essay on ‘Eucken and patent laws’.
Although it is not the primary aim of my paper to address questions related to the current patent system, it seems appropriate to add a few comments here and in some chosen footnotes within the paper (I will revise the paper in this regard). Your feedback in this respect is of great help and highly appreciated.
In what follows I would like to focus on a couple of questions raised by the reviewing comments:
“In the nineteenth century the opposition to the patent system came from free traders, while protectionists favored the establishment of the patent system. Today the terms of this equation have been reversed. Today’s free traders (in the extreme version, neoliberals) are entirely in favor of very strong patent protection (wide coverage of patents and long patent life), while economists favoring protectionism reject strong patent systems and favor, instead, industrial and technological policies in order to acquire technological capabilities. The paper does not address this reversal directly as it concentrates on the historical aspects of these debates.”
This is indeed a remarkable turnaround in the public opinion as well as in the academic sphere. Here, we can even speak of a shift of economic norms (turning away from an anti-patent towards a pro-patent view). In my paper I implicitly try to deal with possible reasons for this politico-economic Umschwung. The following reasons might have had an influence in this development:
1. In 1873, a financial crisis broke out. As a consequence the free-trade and anti-patent movement in Europe were deeply shaken and sustainably weakened. The financial crisis and the following depression were successfully presented as a failed test of the logics of free-trade liberalism by their protectionist rivals. The economic crisis can thus be seen as a trigger of departing from economic liberalism and as a trigger of the reinvigoration of protectionism. While the free-trade movement was tremendously shaken, protectionist measures and instruments such as protection tariffs and other trade barriers as well as patent laws grew in popularity in the following years after the severe depression.
2. The increased acceptance and popularity of protectionism was accompanied by the upcoming rise of nationalism in Europe and beyond in the late 19th and the beginning of the 20th century: the strengthening of national industries via patent laws among others was seen as the basis of a strong and powerful nation.
(Economic) nationalism still plays a major role – especially in the wake and aftermath of economic crises – and it is one of the driving forces behind protectionism. Patent laws are just one way – among others – to depart from free-trade (liberalism), since they raise market entry barriers. Interestingly, Eucken was among the few economists of the 20th century that fought such ‘artificial’ barriers from a consumer(!) and not a producer perspective.
3. In many continental-European countries a transformation of the industrial structure took place at the end of the 19th and the beginning of the 20th century: “at around 1840 Germany e.g. was an industrially underdeveloped country; it heavily relied on the unrestricted import of ideas and inventions and the theft of foreign inventions; Germany was regarded as a nation of imitators and German products as cheap and low-quality imitation and plagiarism of foreign high quality products; as a consequence, German goods with its bad reputation on global markets experienced significant export losses. In this situation of a technological gap of German industries the introduction of a nation-wide patent system would have been counter-productive. But then the transition and catching up-process started: three decades later, in the 1870ies, the protection of inventions and innovations and the protection against plagiarism was reasonable since many high-tech products were introduced for the first time and so the industry and in particular the Verein deutscher Ingenieure demanded patent protection” (p. 9).
A similar development (leading to a shift in attitudes and a transformation of economic norms) can be observed in China and other BRIC-countries where the governments gradually attach greater importance to the protection of intellectual property rights, etc.
4. History of economic thought perspective: The reversal of public opinion in favor of the pro-patent movement and the more or less sudden disappearance of the free-trade movement in the late 19th century were also promoted by a shift in attitudes of the most prominent economists in Germany and elsewhere. In this regard it is of great importance to emphasize that Adam Smith, Jeremy Bentham as well as John Stuart Mill (among others) were in favor of patent laws (cp. footnotes 8 and 20). Since Smith is often regarded as THE ‘father of modern-day economics’ and Bentham and Mill are seen as the founding fathers of utilitarianism (which plays a highly influential role in welfare economics) it is no wonder that present-day economics textbooks justify patent laws as a way to foster inventions and innovations (relying mainly on the arguments presented by the previously mentioned authors).
5. The last and probably most influential reason for this turnaround and political Umschwung leading to the victory of the allied forces of patent proponents was the political agitation and in some sense propaganda of the patent advocates catching the attention of the media and the public. The debate was carried on in newspapers, journals, pamphlets, books, and of course in the daily press, in various societies, associations, chambers of commerce and in the legislatures. The patent dispute as such is an early example of the influence of lobbying pressure groups causing a reversal of opinion in politics and the public.
All these factors together might have contributed to the fact that the pro-patent arguments presented on pp. 5 gained more and more influence both in public as well as in academics.
Nevertheless, the argument that the ‘terms of the equation have been reversed’ (moving from the 19th century into the late 20th century) is of eminent importance and definitely deserves further considerations and investigations (I will revise my paper in this regard).
Moreover, you are absolutely right in observing (and criticizing) the strengthening of the now global patent system and the extension of the regulatory patent law measures within the WTO – all leading to an aggravation of the inherent problems of patents. Thus, the following statements raise legitimate questions and prompt further research issues (cp. also footnote 41 of the paper):
“These questions have become more pertinent now that the standards for patent protection have been extended worldwide [cp. TRIPs/WTO]. […] neoliberalism effectively extended the role of patents (and trademarks) to increase market concentration and market power. […] Patent protection was enhanced, patents’ lifetime was increased and the whole patent system was endowed with new teeth through the countervailing measures that are the core of the WTO regime. […] The strengthening of the patent system was carried out in complete disregard to the contradiction between patents and the neoliberal doctrine about free competition. […] First, what are patents really for? Does the patent system really serve to foster or promote technical innovation? […] Today there is ample evidence that a significant proportion (in many industries a majority) of new patents simply cover minor or marginal innovations. […] There is evidence that current patent legislation may be inhibiting true innovations because of the incentive to concentrate on the easy marginal innovations. From an industrial organization perspective there are indications that patents have a different role, namely to extend monopoly rents through the segmentation of markets and also through setting the groundwork for mergers and acquisitions in which patents are intangible assets.”
All comments point to the question whether patents are the appropriate instrument to foster inventions and innovations or whether they are just means to foster the power of multinational corporations.
As stated in the paper (pp. 7): “Considering that patents hinder rather than further the progress of invention; that they hamper the prompt general utilization of useful inventions; that on balance they cause more harm than benefit to the inventors themselves and, thus, are a highly deceptive form of compensation; the Congress of German Economists resolves: that patents of invention are injurious to common welfare” (resolution adopted by the Kongress deutscher Volkswirthe in 1863).
I totally agree with this and your comments related to the topic. However, once included into the paper, the paper would have a different scope and different aims which would depart from my original intentions. From my perspective it would be more suitable to deal with these topics in a different (upcoming) paper (maybe in joint collaboration).
But there is one aspect of your review that I’d like to comment on separately:
“By establishing the possibility of patenting genes and gene manipulation, as in Diamond v. Chakrabarty, the US Supeme Court back in 1982 opened the door to the blurring of this crucial difference. This is especially important in the so-called life-sciences. I wonder what Walter Eucken would say about this.”
Although my answer might be a bit speculative (since Eucken never dealt with this topic in particular), I conclude from Eucken’s primary literature that he would have opposed the patenting genes and gene manipulation due to different reasons: 1. Eucken would have adopted a negative standpoint since he is highly critical of patents in general; 2. and more importantly, Eucken would have refused the patenting of genes since it incorporates a violation of the Kantian Categorical Imperative. Eucken’s economic ethics is mainly based on Kantian philosophy (and Protestant Social Ethics) and as such he would have refused the instrumentalization of human beings as means to an end.