Arnold Kling  

David Friedman on Property Rights

Marriage and Caste Watch... David Friedman's Machinery ...

He wrote,

The right to decide whether or not I turn on the lights in my house is worth more to me than to my neighbors, so in principle I should be able to buy their permission. The problem is that there are a lot of people living within sight of my house. Buying permission from most of them does no good, since I need permission from all. The result is likely to be a difficult bargaining game, with at least some of my neighbors trying to extort from me a sizable fraction of the value of my land in exchange for their permission to use it.

This suggests that, in deciding how property rights ought to be bundled, there are two important considerations. The first is that, so far as possible, rights should go in the bundle where they are most valuable. The right to control the air a foot over a piece of land is worth more to the owner than to anyone else, so ownership of land usually includes ownership of the space immediately above it. The second is that, since the proper composition of bundles of rights will often be uncertain and may change over time, they should be defined in a way that makes it as easy as possible to trade rights. Property rights should be defined in a way that minimizes the transaction costs of likely transactions.

I wonder if this can be used to look at intellectual property. My instinct is that drug patents make sense, but that software patents do not. (Amazon's attempt to patent "one-click ordering" was a notorious example of the latter. So was Blackberry's loss of a patent-infringement case.) My instinct is based on the idea that a drug company has put a lot of effort into research and testing that a copycat company can avoid. However, somebody who comes up with a software concept might have done so in an afternoon, and the copycat company might also have done so.

One way to think of this is that with ordinary property, assigning rights reduces transaction costs. With intellectual property, assigning rights imposes transaction costs between the owner and the infringer. The question should now be whether the benefits of the intellectual property rights exceed the transaction costs that are imposed. With software patents, the transaction costs are very high, and the benefits in terms of stimulating innovation are little, if any.

Note that I have not said that someone should be allowed to copy software. I think that software copyright is legitimate. But patenting an idea for what software might do is objectionable, in my view.

I have just read Friedman's The Machinery of Freedom for the first time, so expect at least one more post on that book shortly.

COMMENTS (7 to date)
mjh writes:

I wonder if you're familiar with the book Patent Failure. I have not read it, Tim Lee (subbing for Megan McArdle) gave interesting reviews:

Part 1
Part 2
Part 3

Alex J. writes:

The view you have stated about software ip is commonly held by programmers throughout the software industry.

The key is comparative institutional advantage.

Patents are more expensive than other forms of property in terms of administrative and transactions costs, but they're still cheaper than a system of trade secret torts & contract alone.

Drugs are harder to protect as a trade secret than software. So at first glance you might think we should have patents on one but not the other.

But the biggest transaction costs that patents may save is the cost of ownership disputes. Filing a patent requires determining ownership at a point in time before it is clear what the payout will be. Completely aside from their value as an incentive, patents save litigation over trade secret ownership in a world in which inventors collaborate or are not vertically integrated into a corporation that will later produce their work.

Josh writes:

It seems to me that what you're really saying is that software ideas are not that original and should therefore not be patentable. But there is already a non-obviousness clause applying to all patents that should prevent this. The problem with software patents is not that the theory of software patents is bad, it's that too many of them are given that were not sufficiently novel.

That's not to say there have necessarily been any sufficiently novel software ideas in the past 30 years, but I don't see why theoretically there couldn't be.

Alan Crowe writes:

A crucial question about patents is how many patents cover any one sellable product. Traditionally each drug has been covered by a single patent. It makes sense to think of the patent system providing a business model that permits the drug company to spend on research.

That is not the way it has been working with software. Each program is composed of many disparate elements all separately patentable. So it doesn't make sense to think of patents as providing a business model that funds research. The problem is that there is no longer an owner, in the sense of a single owner, there are lots of owners, each with a veto.

So the patent system is effectly capping how much one can spend of research. Whoever spends the big bucks to make a real break through has to share with all the other patent holders. So the game is to avoid spending on research, just get cheap patents and leech of those foolish enough to invest in research.

Whoops! I'm assuming that software is like drugs in that it makes sense to think of scientists working for years at the laboratory bench trying to come up with the side-chain molecule that cures the disease. Software doesn't seem to fit that model. Programmers do the work and patent holders leech.

Ah well. The point I wanted to make was tided to the line "Buying permission from most of them does no good, since I need permission from all. The result is likely to be a difficult bargaining game..." That is not the only problem with software patents, but it is bad enough to kill the software industry all on its own

Mike Masnick writes:

Don't be so sure that pharma patents make sense either. Take a look at what Joe Stiglitz has been saying over the past few years, making the case for how pharma patents do much more harm than good.

There is, in fact, a decent amount of economic evidence to support this, including if you look at the history of pharma (or similarly chemistry industries) in places without patents. What you see is that a lack of patents, even on products that have high upfront costs, you get a more competitive market, which leads to more innovation.

When, instead, you have patents (i.e., monopoly rights), you get slower innovation, large conglomerates, less innovation and more focus on tricks to get patents, as opposed to responding to what the market actually wants and needs.

Luke Stiles writes:

Be careful. Suggesting that research is the reason for granting the patent gets it backwards. The companies research because they know the fruits of its labors will be protected. Simply protecting the fruits of labor is not enough. The earlier comment pointing out that novelty is one of the existing requirements for a patent is on point. We want to reward innovation, not hard work. Granted, innovation often requires hard work, but not necessarily.

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