Perspectives on Patents

Chapter 2
Perspectives on Patents


The history of patents shows that patent systems were created as public policy for promoting social progress. The scope, strength, and life of patent protections were determined according to the economic and social environment of the country to which they were to apply. Public interests and anti-monopoly concerns also informed the enactment and enforcement of patent laws. However, recent decades have seen a global move towards the harmonisation of stronger standards of patent protection. It is important to understand the underlying justifications for patents and explore what approach might play a better role in informing policy makers and judges with regard to patents.

All justifications for property in knowledge must surmount a distinctive feature of abstract objects: non-excludability. Unlike most physical objects, knowledge does not necessarily occupy only one place but can be at many places concurrently. While one’s effective use of a physical object requires the exclusive right over that object, one’s use of a piece of information does not preclude others from possessing and using it. Even if I tell you a formula for a particular substance, that does not deprive either me or anyone else of the formula, although sharing knowledge may keep the original possessor from making a profit from selling that particular knowledge. Prior to the creation of exclusive rights in knowledge, the nature of knowledge itself does not give rise to disputes over who can have access to knowledge. As Edwin C. Hettinger argues, this non-exclusive characteristic of abstract objects provides ‘a strong prima facie case against the wisdom of private and exclusive intellectual property rights’.1 Anyone who proposes strong or extensive patent protection must provide good reasons for why the grant of exclusive rights over abstract objects is necessary when abstract objects, by their nature, do not restrict the simultaneous possession of and use by a multiple number of people.

Numerous arguments have been put forward to justify or guide the development of patent systems. Such theories and perspectives can stimulate useful conversation among participants shaping and enforcing patent law, not only between legislators and judges, but also between policy makers and citizens, thereby enhancing accountability regarding patent policy.2 What kind of ownership in knowledge is appropriate? With a view to fostering conversation regarding such a critical question, this chapter, in the first two sections, reviews two of the most prevalent perspectives; a natural rights perspective and an economic incentive perspective. Each section discusses the reasoning behind each perspective. The chapter does not, however, deal with personhood or personality justifications for intellectual property that are more pertinent to discussion of copyrights. The final section argues that making and reading a patent law should be informed by moral values as well as economic concerns. It submits that international human rights instruments can provide a global normative framework for institutions that govern property in knowledge.

Natural Rights Perspective

The ‘natural rights’ argument implies that individuals have a natural property right in their ideas. Thus, society has a moral duty to recognise and protect that natural right. The use of the word ‘stealing’ or ‘theft’ in the context of patents reflects the natural property right approach to ideas, which is well captured by Edith Penrose’s following passage.

[T]he loose use of the word “stealing” remains in most patent discussions to remind us of the natural property right conception of patents. Stealing … is used in a wider and vaguer sense to include the use by another of a man’s ideas even though they are not in fact patented or patentable under the law applying to him who uses them. Upon this concept all charges of “piracy” are based when they are leveled against nations who permit their nationals to use freely inventions patented elsewhere but which are not patentable under their own laws.3

The ‘natural rights’ argument, by definition, indicates that intellectual property rights are a pre-societal entity and therefore their existence does not depend on positive law. For proponents of the ‘natural property right’ in ideas, the task of positive law would be to secure this natural right of individuals and to condemn the use of ideas by others without authorisation of the owner. This view was reflected in the preamble of the French Patent Law of 1791 which stated:

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.4

Fritz Machlup and Edith Penrose view the entry of the natural property conception to the evolution of patent law as an attempt to ‘substitute a word with a respectable connotation, “property”, for a word that had an unpleasant ring, “privilege”’.5 In fact, the French law of 1791, which recognised the natural property right in ideas, was rather an exception than a norm in the development of modern patent law.6 In most other countries, patents were seen as a privilege granted by the Crown in the medieval era, and then as a legal tool to enhance social utility in the modern era. In addition, we can also see that even the French law of 1791 qualified the natural rights argument by adding a utilitarian requirement that the idea must be useful to society. Nevertheless, recent decades have seen the natural rights argument regain its strength in a drive for raising patent protection globally.7

The purpose of this section is to examine whether the natural rights argument can convincingly support a case for strong patent rights. This section starts with John Locke’s theory of property, which is claimed to provide a foundation for the natural property right not only in material objects, but also in intellectual objects. What follows is the application of Locke’s theory to intellectual objects. This section suggests that the natural rights argument does not provide a strong justification for the grant of patents. Serious consideration of natural rights might lead to common ownership of ideas or a far more moderate form of patent system than the existing one.

John Locke’s Writing on Property and its Application to Patents

Do individuals have a natural property right in ideas? Those who argue for the natural right in intellectual objects derive their justification from Locke’s theory of property. Locke’s theory is commonly considered to provide a justification for private property based on labour. Locke’s ideas on property are scattered in Chapter 5 of the Second Treatise in his book on a theory of civil government.8

1. The world is initially held in common by all people.

2. People have to make use of the common to fulfil the right to self-preservation.

3. Every person has a property in his/her own person and an individual’s labour also belongs to that individual.

4. By mixing the individual’s labour with existing resources he or she makes it his/her property.

5. Property can only be appropriated where there is ‘enough and as good’ left in common for others (sufficiency condition).

6. A person cannot appropriate more than he or she can make use of to the advantage before it spoils (non-waste condition).

Standard accounts of Locke’s theory of property consider statements (3) and (4) to firmly ground the proposition that a person who labours upon resources held in common is entitled to the natural property right to the fruits of his/her labour.9 However, there are two conditions on private appropriation (often referred to as the Lockean provisos): people have to leave a sufficient number of the same or similar things for others (5); people are not allowed to take more than enough, so as to prevent waste (6). As long as these two conditions are met, according to the standard accounts, private appropriation of what one labours upon is justified.

When applied to intellectual objects, this account of Locke’s theory apparently sees little problem in supporting intellectual property as a natural right. Although Locke did not seem to have in mind intellectual objects in his writing on property, some believe that intellectual property is even better suited to Locke’s theory than real property. Justin Hughes provides the following reasons for which intellectual property rights are well grounded by an appeal to Locke: ‘first, that the production of ideas requires a person’s labor; second, that these ideas are appropriated from a “common” which is not significantly devalued by the removal of ideas; and third, that ideas can be made property without breaching the non-waste condition’.10 For Hughes, since the value of an idea originates from mental labour of human persons, ideas are susceptible to Locke’s theory linking property to the product of one’s labour.11 He contends that a seemingly inexhaustible stock of ideas is most similar to Locke’s common and, furthermore, that propertisation of ideas even expands the intellectual common by adding new ideas. Thus, private appropriation of ideas surmounts the Lockean sufficiency condition.12 Lastly, ideas are less subject to waste because they are not perishable as, for instance, foods are.13 Robert Nozick, in his analysis of Locke’s theory of property, contends that patents are an example of private appropriation that do not violate the Lockean ‘enough and as good’ proviso (sufficiency condition).14 Nozick interprets the Lockean proviso as prohibiting worsening others by depriving them of what they previously had.15 In his view, patents do not worsen others’ situations as the invention subject to patents would not exist if not for the inventor.16

Lockean theory discussed so far seems to support a claim that: ‘I invented it. So it’s mine and no one else’s’. However, it seems unclear why the fruits of one’s labour upon the common become the private property of an individual person rather than a part of the common. It is also unclear as to the underlying motivation behind which private appropriation is justified, as a matter of a natural right. Can any sort of thing be subject to private property? These questions redirect attention to Locke.

Ideas and Intellectual Commons

Contrary to the preceding discussion, Seana Valentine Shiffrin argues that Locke’s view does not support all sorts of propertisation, in particular, intellectual property.17 She stresses the importance of common ownership in Locke’s theory of property and qualifies the kind of things susceptible to private appropriation. In her view, intellectual objects, such as ideas, inventions and expressions, are unlikely to be justified by the Lockean theory of private property.

If the world is initially owned in common by all people,18 in other words the common ownership of resources is a default situation of people,19 it would be fair that private appropriation is qualified by specific conditions enough to change the default position.

The Lockean justification for private appropriation originates from the right of self-preservation.20 All human beings have a right of self-preservation, which is discovered by natural reason.21 People have to make use of the world given to people in common to fulfil the natural right to subsistence.22 Yet the use of some items can be meaningful only by exclusive appropriation. For instance, a pear nourishes a person only when she takes it and incorporates it into her body. As such, appropriation seems the only way that one can make beneficial use of materials that one has in common with others. This explains what motivates Locke to endorse private appropriation. Following this line of reasoning, Shiffrin argues that private property is justified where the exclusive use of an article is necessary for the beneficial use of the common and to fulfil the right to self-preservation.23 On her reading, labour enters into the process of appropriation as ‘an appropriate means to stake a claim’24 over a thing by improving the value of the thing or making it beneficial. She considers that the ‘enough and as good’ and non-waste conditions of the Lockean provisos function to make sure that private appropriation does not undermine the equal rights of everyone to self-preservation and the duty to make effective use of the common for human benefit.25

Is appropriation of intellectual objects justifiable by Lockean theory according to this line of reasoning? Intellectual objects, in comparison to physical objects, have distinctive features.26 Unlike physical objects, intellectual objects can be used simultaneously by a multiple number of people. One’s use of an intellectual object does not prevent others from using the same object, in the absence of artificial restrictions. Ideas do not require exclusive use for their value to be fully realised. In addition, while one can appropriate and use a physical object by a private act, exclusive possession of an intellectual object and its enforcement requires public intervention by a granting authority and/or a court. Furthermore, an intellectual property right is, by nature, not a right to use but a right to prevent others from using the idea. Accordingly, Shiffrin argues that restricting the use of intellectual works to specific individuals is against the ‘presumption of common ownership and the concomitant concern to make full use of resources’.27

However, one may object to this common ownership of intellectual objects, arguing that there is no such thing as the intellectual common in the first place. The underlying assumption behind this objection is that ideas, methods, and processes are all pure creations of individual labour and, therefore, they are the property of the individual labourer. Robert Nozick’s treatment of patents comes close to this view by attributing an invention solely to the inventor.28 However, it seems unreasonable to claim that intellectual products involve nothing but a single mind. For instance, most (if not all) subject matter of patents draws upon facts about the physical world, and is most often the result of a process, building on others’ ideas over time. Seeing an invention as something attributable solely to the inventor is therefore extreme. It is also extreme in view of the implication that flows from it that may lead to an absolute right of the inventor to control the availability of the invention in any manner.29

It seems widely acknowledged that there are intellectual commons comprising a range of ideas, facts and propositions among other intellectual products.30 Here, a less absolutist objection to the common ownership of intellectual objects would be that even if an intellectual product involves using common resources, the product belongs to the realm of private property. Nozick seems to support this view in his example of where a medical researcher discovers a new substance using materials in the common.31 In his view, the researcher’s propertisation of the substance does not matter as long as the raw materials are still available to others in common.

However, Shiffrin counter-argues that the crucial question for a Lockean justification for private appropriation is whether a specific thing in question requires exclusive use or control in order to be made useful.32 It follows that even though intellectual products are only partly based on the intellectual common, the non-excludable nature of intellectual products renders a natural right to intellectual property groundless. Intellectual products have little reason to depart from the common ownership presumption. Moreover, in her view, the presumption of common ownership, importantly, is a reflection of ‘the equal moral status of individuals’.33 Therefore, unless the nature of a given thing requires exclusive use or control, moral reasons tell us that the thing should become part of the common so that it can be available to everyone.

This view presents a contrast to Nozick’s interpretation, which gives primacy to private appropriation as long as no one is worsened by being deprived of what they had previously. But why do we have starkly different interpretations of Locke’s theory of property? Perhaps the difficulties inevitably arise from the fact that Locke’s writing on property itself entails elements that are not easy to reconcile. On the other hand, it is fascinating that Nozick’s view on patents presents a contradiction with his libertarian belief,34 considering that the exclusive rights of the patent holder exist only by State action that artificially restricts the availability of ideas.

Apparently, Locke’s theory of property does not support one single form of intellectual property. However, even if the exclusive use or control of intellectual products is not justified as a matter of natural right, a need to reward intellectual workers for their work deserves separate attention. In that context, a question of whether the exclusive right over intellectual products is an appropriate form of reward may be raised. A related question is discussed under ‘The Right to Benefit from the Protection of the Moral and Material Interests Resulting from any Scientific, Literary or Artistic Production of which He is the Author (Art. 15.1(c) of ICESCR)’ in Chapter 5.

So far, a serious doubt has been cast on the use of Locke’s theory of property to ground the exclusive rights over intellectual objects as a natural right. Nevertheless, it might be worthwhile exploring whether the natural rights argument remains helpful for guiding legislators and judges with regard to patents. What follows is an examination of the difficulties the natural rights argument for patents might encounter.

Boundaries of the Natural Property Right

According to the natural rights argument, labour creates the property right. In other words, an inventor has the natural right to the fruits of his/her labour, the invention. However, it may not be easy to identify who gets what as a natural right. We need to address issues such as: first, to distinguish the different components of value of the resulting invention with a view to identifying the owner(s); second, to define what sort of property right the inventor is entitled to.

First, identifying the natural right holder to a given intellectual product requires an investigation of who added what portion of value of the product because what the labourer would be entitled to, as a natural right, is the value he or she added. An initial distinction should be made between ‘the value attributed to the object of the labour and the value attributed to the labour itself’.35 For instance, there is a new substance made of existing chemicals. The question is over the portion of value attributable to the labour, separately from the value residing in the chemicals, which was exerted to discover a new way of synthesising the chemicals.

One might assume that the distinction is made between the value added by the inventor and the value that the object has on its own. Nevertheless, the inevitably cumulative process of invention poses another difficulty. The inventive idea of an inventor is built on the ideas of others.36 Therefore, even though we succeed in separating out the value that is attributable to human labour from the total value of an intellectual product, we have another task to determine each share of value that is attributable to not only the last contributor, but also every other contributor. However difficult this task may be, being faithful to the natural property right would not tolerate any contributor being missed out from their entitlement. Otherwise, the natural right argument would find it hard to avoid the sort of criticism raised by an editorial in The Economist as early as 1850:

Before … [the inventors] can … establish a right of property in their inventions, they ought to give up all the knowledge and inventions of others. That is impossible, and the impossibility shows that their minds and their inventions are, in fact, parts of the great mental whole of society, and that they have no right of property in their inventions, except that they can keep them to themselves if they please and own all the material objects in which they may realize their mental conceptions.37

Under modern patent law, innovators who build on an earlier patented invention have to buy the earlier patent or get a licence from the patentee. The amount of reward that each innovator gets depends on the market value of each patent.

More complication would follow if several persons (or groups) independently come up with the same idea and apply it either at the same time or subsequently. The Lockean labour-based theory of property would mandate the recognition of the natural property right of all the parties. Nozick also permits other independent inventors to make and sell their own invention.38 From this point of view, the natural rights argument would require a reform of current global patent standards that do not recognise the right of independent inventors but only the right of the first applicant of a patent. However, this is not the only inconsistency in current patent law with the natural rights argument, suggesting that patent law is not based on natural rights.

Secondly, assuming that we succeed in separating out each labourer’s own contribution to the intellectual product, we need then to ask what sort of property rights the inventor(s) is entitled to. According to the natural rights argument, one’s labour entitles the labourer to the fruits of his/her labour. The right to the fruits of the labour seems legitimately to entail a right to possess and personally use what the labourer created to the advantage of his/her own benefit.39 In most cases, however, the exclusive right over the intellectual works seems unnecessary as the inventor can enjoy the personal possession and use of the invention without exerting an exclusive right.

However, the intriguing question is whether the market value of the product of labour also constitutes what the labourer is naturally entitled to. Current international patent law is designed to allow a patent holder to sell a patented invention in the market and reap profits by excluding others from using and selling it, without authorisation of the patentee, for a limited period of time. But is this a matter of a natural right? Edwin C. Hettinger argues that it is not.40 Market value is ‘a socially created phenomenon’.41 Market value of a product depends on varying social factors, such as other producers, the conditions of consumers, the government’s related regulations and so on. Nozick appears to believe that meeting the conditions of just acquisition in the first place justifies its transfer in the market.42 However, there seems to be a huge gap between a moral right to the fruits of one’s labour and a right to receive the market value of the product. Peter Drahos also pays attention to a similar point, raising the question ‘how can labour ground a natural right to market value if that value is determined not by individual labour but by the demand activity of others?’.43 As Hettinger puts it, ‘to what extent individual laborers should be allowed to receive the market value of their products is a question of social policy’.44 Although it is often neglected, Locke himself stated that civil law and government has to regulate the property relations in a monetary world.45

Limitations upon Propertisation of Ideas

As briefly touched upon before, for Locke, private appropriation is justified when it satisfies two conditions (referred to as Lockean provisos): the first condition requiring enough and as good to be left for others to use to their benefit (sufficiency condition);46 and the second condition prohibiting taking more than enough that results in waste (non-waste condition).47 Earlier, this section has questioned whether intellectual objects can be susceptible to private property, departing from the presumption of initial common ownership. Here, however, it assumes that intellectual objects as such are not prevented from private appropriation at the outset, and asks whether patents satisfy the Lockean provisos. More specifically, the question might be whether the rights to exclude others from using or making a patented invention or process satisfy the test that the Lockean provisos place before any private appropriation. The examination would tell us whether the rights granted by patents are justified as a matter of a natural right, and, further, what the Lockean provisos can inform patent law making if one wants to see a justifiable patent system in light of natural rights.

Some argue that intellectual property is not restrained by the Lockean provisos because intellectual objects are abundant enough not to leave others worsened by private appropriation, and do not spoil in the way, for example, that agricultural products do.48 This line of argument would justify the existing patent system or promote the grant of an even wider range of exclusive rights in ideas. Is it a valid argument however? The next section will examine whether patents easily surmount the Lockean provisos on legitimate private appropriation.

Sufficiency condition

While Nozick acknowledges that one’s ownership affects the situation of others, he argues that ownership does not necessarily worsen the situation of others.49 His example is that although one’s appropriation of a grain of sand from an island removes others’ liberty to act on that grain of sand, plenty of other grains of sand or different objects would remain for others.50 However, as Sigrid Sterckx points out, ‘this is not valid for anything covered by a patent’ as patent law would exclude others from using a product or process covered by patents.51 A sufficient number of other objects may be an irrelevant factor if others need the specific one that falls into someone else’s private property.52 Therefore, the situation of others is arguably worsened by the fact that they no longer hold the same liberty to do with an object as before the object became subject to a patent.

However, Nozick contends that patents do not deprive others of anything that they had before as the invention would not exist if not for the inventor.53 Therefore, according to him, patents do not breach the sufficiency condition. Nevertheless, as discussed earlier, it is clear that inventions do not come out of a single genius mind but exist through building on preceding ideas. Without the grant of an exclusive right to the first inventor, others could have a liberty to use the existing ideas, including making something comparable to the invention and benefiting from the outcome. Nozick concedes that independent (or subsequent) inventors are deprived by patents and suggests that independent inventors should not be excluded from using and selling their own invention, and that there should be a time limit placed on patents.54

Apart from independent inventors, a patent may prevent further development of the first invention. Also, other users may also be worse off as patents limit their liberty to ideas that otherwise could have been freely available to them. Consider Hughes’s remark that ‘such distribution problems are not found in pre-property uses of the field of ideas’55 that are in the physical common. Hughes, however, contents himself with extraordinarily important ideas or widely used ideas not being propertised, holding an optimistic expectation that patents would augment the common.56 As to the concern about other users, Nozick would insist that people could still buy the patented products and processes in the market, and their loss of liberty may be counter-balanced by increased social welfare.57 However, whether patents increase social welfare and expand the common is a typically utilitarian question,58 and may not critically determine whether private property in ideas is a natural right.

The sufficiency condition becomes particularly pertinent in relation to the right to self-preservation. Although Nozick appears to acknowledge the importance of the Lockean proviso in cases where a person’s life is at stake,59 his treatment of patents fails to fully reflect the ideas embedded in the sufficiency condition.

In short, the claim that patents do not deprive others of anything seems weak. If patents are to survive the sufficiency condition, a substantial change should be made in existing patent law. The following seem at least required by the sufficiency condition: (a) independent inventors should retain their liberty to use and sell their own invention; (b) a term of protection of patents should not be long, considering that someone else may well have come up with the same idea had it not been for patents; and (c) food and pharmaceutical products that are necessary for self-preservation should not, in principle, be subject to exclusive patent rights.

Non-waste condition

Locke’s second proviso on the legitimate acquisition of property prohibits spoilage caused by appropriating more than one needs. Taking more than one can use and letting it spoil is considered wrong because it is wasteful. Thus, it is also referred to as the non-waste condition. Obviously, ideas are not perishable in an absolute sense. However, in a social sense, the value of an idea can perish as it becomes obsolete. If an idea is left unused while someone needs it, there can be said to be waste.

Edwin C. Hettinger points out that the non-exclusive nature of ideas makes it hard for patents to meet the non-waste condition since everyone could simultaneously use and benefit from ideas were it not for patents.60 Therefore, it seems legitimate to say that ‘those who appropriate ideas with a view to doing nothing with them arguably infringe Locke’s spoilage proviso’.61 Even if an invention is used by the owner, the restriction of its beneficial use by high royalties or other conditions may amount to a violation of the non-waste proviso.62 The more people cannot access the invention that they need, the more waste the patent in question may cause.63 What are the devices that patent law can have for tempering waste induced by the exclusive rights of patent holders? (a) Patent law should have appropriate standards for patentability, especially regarding inventive step, so as to grant a patent to genuine innovations only; (b) a patent holder should be required to work their invention (working requirement); (c) using a patented invention or process should be made possible without authorisation from the patent holder for socially beneficial innovations whose usage is being prevented by high fees or non-exploitation (compulsory licensing).


It is questionable that Locke’s theory of property supports the exclusive rights over ideas as a natural right. Rather than endorsing an absolute right of a patent holder, Lockean theory guides us to pay particular attention to the subsistence right of everyone and the beneficial use of resources in shaping the institution of property. In so far as an exclusive right in ideas is made possible only by State action, the argument for the pre-societal status of patent rights is weak.

Thomas Jefferson, the first administrator of the US patent system, was critical of natural rights argument over inventions although he is known to have been a Lockean sympathiser. His following passage leads us to explore other theories of patents as well as providing insights regarding the natural right argument for intellectual property.

It has been pretended … that inventors have a natural and exclusive right to their inventions … If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea … Its peculiar character … is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should be freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been … designed by nature … Inventions then cannot, in nature, be a subject of property. Society may give an exclusive right to the profits arising from them, as an encouragement … to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody.64

Economic Incentive Perspective

The economic rationale of a patent system is that patents are an efficient method of stimulating socially valuable works and economic progress. The idea has been the most prevalent justification for patents throughout the history of patent law, as discussed in Chapter 1. In England, the Statute of Monopolies of 1623 allowed, as an exception to the proscription of monopoly, temporary monopolies in the exploitation of innovations.65 The US also located the foundation of patent law in its role of stimulating the production of socially valuable works.66 Modern patent laws in Europe and North America in the nineteenth century, despite variations in the level of patent protection, shared the view that patents were adopted as a public policy to encourage technological progress and increase access to knowledge. This idea is also embedded in TRIPS, which manifests ‘the promotion of technological innovation and to the transfer and dissemination of technology’ as the objectives of the protection and enforcement of intellectual property rights.67 To this point, it is important to note that the focus of the economic approach to intellectual property is not to reward creators for their labour but ‘to enrich the public at large’68 by generating more knowledge. Patent law is a means to provide incentives to spur inventive activities.

It is necessary to inquire into why exclusive rights in inventions are needed as a stimulus to knowledge creation. The necessity of an incentive scheme stems from economic analysis of the market and the public-good characteristic of knowledge. The argument follows these lines: inventive activity requires the investment of resources. In a market economy, rational actors, based on self-interest, will invest in knowledge creation when they can economically benefit from the use or sales of the invention. In other words, they will be dissuaded from allocating resources unless they can reap a sufficient return exceeding their costs. However, the creation of knowledge in free unregulated competition will not guarantee investors profit opportunities since knowledge has characteristics of a public good.69 Knowledge, by its nature, can be used by several people simultaneously without depletion. However expensive it is to create new knowledge, the cost of its reproduction is generally low.70 Furthermore, once knowledge is created, it is hard to exclude others from using and benefiting from it. Therefore, the self-interest of each company would tell them not to invest in the production of knowledge, but rather let others do so and then to take advantage of it.71 For these reasons, there is a danger of undersupply of new knowledge if the production of knowledge is left to the market.72 It follows, therefore, that the optimal investment and supply of public goods, including information, requires intervention of government.73 Having the government fund public goods is one way to correct this sort of market failure. Classical examples of a public good, such as lighthouses and national defence, are funded by the general revenue of government. Knowledge creation may also be financed by the government. However, information policy is attracted by a different incentive scheme, which is the creation of intellectual property in knowledge, although it also relies on government intervention.74

According to the economic rationale, the main objective of patents is to stimulate the creation of more knowledge, thereby promoting social progress. However, the creation of knowledge induced by patents does not come without costs. While the benefit is increased knowledge, the cost is exclusive rights that curtail widespread access to knowledge. It is paradoxical that patents aim to create more knowledge by restricting the diffusion of knowledge.75 Thus, striking an optimal balance between the costs and benefits of patents is essential for patents to function as an efficient incentive scheme. The notion of efficiency in economic analysis is determined by overall net utility. As to knowledge, efficient incentive schemes are expected to encourage investment in creating new knowledge with the lowest possible costs.76 In this sense, the aim of a patent system is to stimulate ‘the optimal level, not the maximum level, of innovation’.77 A patent system is nor about the maximisation of profit.

The economic incentive perspective on patents invites such questions as: whether the benefit of the current patent system outweighs the costs; whether there is any other better incentive system for invention and innovation?78 Both questions require empirical research which is beyond the scope of this chapter. What this section will do is to sketch the economic and legal literature on these questions.

Economic Justifications for Patents

Economic studies identify four major economic justifications for the grant of a patent.79 Note that these justifications are not mutually exclusive.

1. Patents stimulate more invention.

2. Patents induce investments in developing and commercialising the invention.

3. Patents encourage the disclosure of the information underlying the new invention.

4. Patents help to reduce duplicative investment in the innovation of the same prospect.

The incentive to invent theory

The most conventional thesis is that a patent system provides an incentive to invent, which is supported by the following line of reasoning.80

Industrial progress is desirable to society. Inventions are essential to promote industrial progress. An adequate extent of inventions will be secured when inventors have the prospect of yielding a return from their time and efforts put into the invention. The free market will not secure that inventors appropriate the value of the invention because knowledge has public-good characteristics. It is necessary to have special incentive mechanisms for stimulating inventions, among which the most effective is the grant of an exclusive patent right in inventions.

However, this rationale inevitably has to deal with the problem of welfare losses associated with monopoly, such as high prices and lower output.81 In addition, increasing recognition has been given to other costs a proliferation of patents might bring, for example that patenting an invention may deter other inventors from undertaking the follow-on inventive work.82 The problem of slowing down further innovation will be further discussed in under ‘Patents as an impediment to future innovation’ below. These social costs stem from the nature of the patent system, which is meant to increase inventions by subjecting new knowledge to the exclusive control of the patent holder. The underlying assumption of this rationale is that patents bring forth a greater amount of invention, offsetting the costs caused by the temporary exclusive rights.83 Nevertheless, it is not clear that the level of current patent protection reflects an optimal balance between the costs and benefits. This intrinsic problem of patents has induced a growing body of studies84 on alternative incentive schemes, as well as on the optimal form of a patent. This is further discussed later in this section.

The incentive to commercialise theory

The rationale that patents in an invention induce the companies to allocate additional resources to the development and marketing of the invention is closely related to the preceding argument. A company would be dissuaded from investing in development of a new product if competitors could duplicate the product without incurring the cost of the development. Competition would bring the price down to marginal costs and the original firm would be unable to recoup the costs of invention.85 Free-riding, or benefiting without contributing to the cost of development, would not necessarily be a problem as ‘it contributes to the diffusion of information and so adds to the productive potential of an economy’.86 However, free-riding is considered to constitute a problem since the market cannot ensure that sufficient resources be allocated to innovation. Thus, the economic rationale suggests that granting exclusive patent rights is necessary to stimulate the additional investments necessary for inventions to be put into commercial use. Allowing the patent holders to set proprietary prices and appropriate returns from the investment is the means to this end.

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