Obstructing Innovation:
The Case Against Patents and Copyrights
Dean Baker in conversation with The Straddler

Dean Baker, Washington, DC, 2015                                                                       Photo: Jeff Adkins

On May 27th, The Straddler met with Dean Baker at his offices in Washington, D.C. Baker, a macroeconomist who is co-director of the Center for Economic and Policy, has long been a vocal critic of the patent and copyright systems. In a 2011 piece in the New York Times, for example, he argued that “[t]he over-friendly patent policy in the United States…shifts enormous sums from the middle class to the wealthy.”[1] More recently, pointing to the prospect of the expansion of patent protection in the Trans-Pacific Partnership (TPP), a trade agreement currently in negotiation between twelve Pacific Rim nations including the United States, he wrote that “[r]eal fans of free trade should be appalled by the prospect of stronger patent protection.”[2]

We previously spoke with Baker on other areas of his work in our springsummer2011 issue. That conversation can be found here.

May 27, 2015
THE STRADDLER: What is the distinction between patents and copyrights?

DEAN BAKER: Patents are usually thought of as being for scientific innovation. There is some overlap with software, but basically we think of patents in terms of the development of a new chemical, a new industrial process, or a new drug. Copyright is generally thought of in terms of an artistic product—music, movies, books. Those sorts of things. Again, with software you have some overlap, but for the most part, copyrights are for creative and artistic things, and patents are for science and industry.

THE STRADDLER: What is their origin?

BAKER: Both date back to the late Middle Ages. Patents were connected to the guild system. Masters in a trade—blacksmiths, say—would bring in apprentices and teach them the craft. Patents would prevent the apprentices from going somewhere else and using that knowledge. In effect, patents tied apprentices to masters for a specific period of time, after which they would be free to go out and use what they had been taught.

The origins of copyrights are usually traced back to Venice in the fifteenth century. Writers would create work and would have claim to it after they wrote it so that others couldn’t make copies and sell them.

Both patents and copyrights developed through time, but it wasn’t a direct route to stronger laws. In the United States, patents and copyrights are often conflated with the free market. By definition, they are not the free market. They are government interventions that give people monopolies. If you have a patent on a particular drug, you can have people arrested who make copies without your permission. So it’s totally at odds with the free market.

THE STRADDLER: Was there a conventional duration for patents and copyrights that has since been extended, or have they always been flexible in terms of the number of years?

BAKER: Copyrights were originally fourteen years after the death of the author, but they have been repeatedly lengthened. In the mid 1970s, they became fifteen years after the death of the author.  In 1998,when Mickey Mouse was about to go into the public domain, they were extended to seventy years after the death of the author, and to ninety-five years for works that had corporate authors. At the time, people joked that Congress had passed the Mickey Mouse Copyright Act. It was perverse. The argument for copyrights says that they give people incentives—but you can’t retroactively give people incentives. Making it ninety-five years instead of seventy or fifty can’t give people in the past more incentive.

In the case of patents, they have generally been fourteen years. They were extended to seventeen years for a time, and most recently to twenty years during the WTO round of the GATT in 1995.[3]

THE STRADDLER: Do you think patents and copyrights should exist?

BAKER: In the case of patents, I would distinguish by types of products. For prescription drugs, I think patents are extremely pernicious because you create an enormous gap between the free-market price and the patent-protected price. The reason is that the patent is the product. The cost of production of most drugs is very low. But when you pay hundreds or even thousands of dollars for prescriptions, it’s because the company has a monopoly on something that you need for your health, or possibly even your life. If you have a way to pay for it, you’ll pay for it. That’s incredibly pernicious.

When you have a patent on an industrial product—a particular type of electronic window, for example—it doesn’t make much difference in the price. It’s less of an issue. So my inclination would be to pull out drugs, have them publicly funded, and not grant patents.

People always ask, if there weren’t patents, who would pay for the research? Well, you would pay for the research. We spend $30 billion a year now on biomedical research through the National Institutes of Health. We’d have to spend a lot more—we might have to more than double it. But we spend $400 billion a year on prescription drugs. If we had them sold in the free market, my estimate is that we’d probably spend about $40 billion a year on prescription drugs—leaving us with $360 billion to play with. We could fund a lot of research with that money.

The proponents of patents in this realm have a very strange conception of knowledge. No one argues against the funding for the National Institutes for Health. In fact, the drug industry is its biggest proponent—and why shouldn’t it be? It’s its biggest beneficiary. But what proponents of patents say is, okay, they do great stuff at NIH, but if you ask them to actually develop a drug—that is, take it through the clinical testing process—they become morons. They couldn’t do it.

Well, let’s think about this. We’re spending $30 billion on NIH right now, and most of that is on basic research. Now we want to ask them to go through the next steps and create a workable drug that is carried through the clinical testing process. Let’s hypothesize that they’re not as efficient as the private industry on a dollar-for-dollar basis. I don’t see any reason why that would be the case—I actually think the opposite would be true, for the simple reason that if it were publicly funded, it would be available to the public and researchers would be able to share research. We usually think science advances best this way. But let’s just say it is less efficient. How much less efficient would it be? I’ve tried to have this argument with economists, and the answer is always, well, they just couldn’t do it. A dollar and a half? They just couldn’t do it. Two dollars? They just couldn’t do it. But there’s clearly some number where a dollar of private industry research equals some amount of publicly funded research. Again, my guess is that it would be less than a dollar, but even if were two dollars, you could replace the research being done by the drug industry with publicly funded research and get rid of some of the crazy problems we have. For example, Savati, the drug for treating Hepatitis C, is $84,000. You can get a generic version every bit as good in India for less than $1,000. We have all these people wringing their hands asking, do we pay $84,000 for everyone with Hepatitis C? It’s about three million people. A lot of them are drug addicts. Did they bring it on themselves? They’re on Medicaid. Should we do this for them? Well, if it were nine hundred bucks, we wouldn’t have that argument.

THE STRADDLER: What about the argument that the private sector is able to respond more flexibly and quickly when it comes to newer or rarer conditions?

BAKER: You could actually do this research in the private sector. You could give it to Pfizer or Merck. The only difference would be that everything they did would be in the public domain. They wouldn’t get patents for it. I have people who ask me why they would do it if they weren’t getting patents. The answer is because they’d be getting paid to do it. We usually think people work for money.

So, if we take a chunk of money, $40 billion or $50 billion, and you distribute it each year over ten years, you have $400 billion or $500 billion. With this money, you take competitive bids and award contracts. The companies that get contracts have periodic reviews, and when the contract comes up, the company says, look, here are all the things that we’ve done. And then they put in another bid. Maybe last time they got $12 billion over the ten-year period, but now they want $18 billion. Or maybe the company really didn’t do very much, so this time around it won’t get anything. I don’t see any problem at all with the money going into the private sector—the point is that everything they create would be in the public domain.

THE STRADDLER: So the funding would not be narrowly directed? The government wouldn’t give this money and say, for example, you need to come up with something that has these specific effects on these two very specific conditions. It would be funding that was more generally directed?

BAKER: That’s what I envision. Maybe you have a company that says, look, we have a background doing cancer research, doing research in heart disease, doing research in arthritis. We want this much money, this is what we think we can accomplish, and these are the areas in which we anticipate we will develop drugs. If they get the money, they’ll be evaluated, and they’ll have competitors, and we’ll be able to see what they did, and what their competitors did. We understand it’s hard to develop a new drug, but if your competitor develops ten new drugs and you don’t develop any, well, then there’s a problem and you have some explaining to do.

THE STRADDLER: You have written that drug patents not only increase costs, but also create incentives to hide facts or suppress information about drugs that may be dangerous.

BAKER: When I raise this with economists, they invariably look at me like I’m making bizarre accusations. But I say, read your textbooks. We all understand that if we put a twenty-percent tariff on imported shirts, the apparel industry is going to lobby to keep it, and to extend it to apply to other areas, like suits. It’s in every textbook. They’re going to hire lobbyists and lawyers, and there will be a lot of waste. You have to understand this to be a Ph.D. economist.

Okay, but then you say, here are drugs that are selling for a hundred times their free market price, ten-thousand-percent tariffs—and we don’t expect drug companies to try to maximize their profits? This is textbook economics. And whatever they do for a twenty-percent tariff, doesn’t it make sense that they’ll do a lot more of it for a ten-thousand-percent tariff?

Probably a month doesn’t go by where there’s not an accusation that a drug company has concealed evidence that its products are less effective or even harmful. Vioxx is a famous example. It was an arthritis drug that, it turned out, tended to increase the risk of heart problems. Merck was accused of knowing this, and of concealing evidence. They settled the suit, and no one admitted guilt, but clearly they would have had enormous incentive to have done that. And economists usually think people respond to incentives. We’ve given drug companies an enormous incentive to conceal evidence that their drugs are harmful or less effective than advertised.

THE STRADDLER: What about the phenomenon of people buying up patents in use in new technologies, and then suing people who are using those technologies?

BAKER: The term is “patent trolls,” and a lot of people have been harassed this way because when you get new products, invariably there are large numbers of patents involved. The dream of every patent troll is just to get through summary judgment—then you’re looking at a trial and likely a lot of money.

The classic example is Blackberry. When Blackberry first came out it was a real hot product. It was the first smartphone, and it was big for business. People were using it for email, staying in touch with their office, their sales people, whatever it might be. Blackberry was faced with a suit for patent infringement, and they were very confident that they would win it if it went to trial. But it got through summary judgment, and because the laws are very friendly to patent holders, the plaintiffs got an injunction. A judge was actually going to shut down Blackberry. Well, Blackberry couldn’t have that. They had a new product on the market going to an upscale clientele—the whole point was that you could be in touch with your office every moment of the day. If Blackberry were to be shut down for a week or two weeks, it would be deadly. So they coughed up $400 or $500 million—just to settle. You get things like that all the time.

My view is that there’s probably still a place for patents in industrial processes, but we should try to minimize them. Amazon famously patented one-click ordering. My joke is that that’s like patenting turning left when you get to the fork in the road. But they got a patent on it. It later was weakened, but meanwhile they held up a lot of innovation.

Patents should be more narrow in scope, and they should be shorter—three years, say, instead of twenty years. Right now, we have an R&D tax credit equal to roughly ten percent of total dollars spent. I would be in favor of raising that to something like twenty percent and saying that if you accept it, you agree your patent is just for three years. After that, it turns over to the government. And the government would say, okay, anyone can use it as long as they themselves don’t claim patent ownership. But if you want to take this patent and use it for something where you yourself are going to claim a patent on it, then you have to come talk to us. If you did something like this, it would make life very difficult for patent trolls.

THE STRADDLER: What about something like Apple’s suit against Samsung, which included these really minor details like Apple’s objection to Samsung’s phone having a bounce feature when a user came to the end of scrolling?[4]

BAKER: What that suit came down to was, you’re making a phone that looks like our phone. That doesn’t make any sense. If you’re in business, you’re going to have competitors. GM looks at Ford’s cars and vice-versa. Samsung and Apple, every time they came out with a new phone, each one sued the other, and usually they would end up settling and agreeing to drop each other’s suits.

A few years back, Google bought up Motorola’s mobility division. The conventional wisdom in the business press at the time was that they had bought it up because they wanted their patents—not as much because they wanted to use the patents, but because they wanted them as a defense. They were going up against IBM and these other companies that had accumulated an endless pile of patents. They didn’t have that, so they wanted to have a backlog of patents in case they were hit with a suit. Then they could say, Oh yeah? Well, we’re suing you. Here, we have these patents. And then you work out the deal—you drop yours and we’ll drop ours. That’s utterly absurd.

THE STRADDLER: On copyrights, a number of creative people have an emotional connection, and this is usually twofold. On the one hand, the thinking is that no one can steal your idea. On the other hand, once your idea is out there, no one can use it for their own commercial gain without your sign off. If you write songs, for example, Toyota can’t just come along and use your song in one of its commercials.

BAKER: I guess I understand that, but I’m not all that sympathetic to it. You know, you put an idea out in the world, it can be taken. You have an absolute protection for that—don’t put it out there. What you’re saying with copyrights is that you want the government to go out and police the world and say some people get to use your idea and others don’t. Well, the government isn’t there for that. I’m being a little sarcastic, but not totally. A lot of scientists who made important discoveries and innovations that contributed to the atomic bomb were totally against the atomic bomb. You had people who were great theoretical physicists, and they had great breakthroughs, and these were used to make a device that could kill hundreds of thousands of people—potentially the world. That’s really tragic, and we don’t have laws that would have prevented that. So if someone’s using your song for a stupid jingle for the car you hate—I’m sorry, that’s unfortunate, but if you’re really worried about that, keep it to yourself.

THE STRADDLER: What about making sure the artist gets paid?

BAKER: You do have artists who make money on copyrights, but their number is very few. Someone like Taylor Swift has gotten very rich, but meanwhile, you have plenty of accomplished professional musicians who rarely make anything substantial on copyrighted music. A lot of the money that is produced in the copyright system goes to the intermediaries, not to the artists.

I understand that people need to be paid. One of the things that I’ve argued for is some sort of refundable tax credit—a voucher, if you like—that people could use to support creative material. Some people think this is a weird idea, but it’s not actually different in form from the tax credit for charitable deductions. Instead of being a particular percent—if you’re a rich person in the forty percent bracket, the government is paying forty percent of your charitable donation—make it a hundred percent, but make it a relatively small amount of money. A hundred dollars per person, say. That would support a huge amount of creative work—a whole lot more than is currently being supported through the copyright system. And the condition of getting the money would be that your work would not be subject to copyright. So if you want copyright, you stay out of the system. If you want to be able to compete for this money, then you have to give up copyright. My guess is that people might not like it at first, but that you would see a lot of writers, musicians, whatever, who would take advantage of it and be fairly successful.

THE STRADDLER: So you see copyright as not protecting the artist in general, but in protecting a very select few, very high-earning artists—whereas the rest of people engaged in creative endeavors are not particularly well served?

BAKER: Copyright is not working for the vast majority of creative people. And I’m talking about accomplished people who have had some success. They get very little from their music or their writing or whatever it might be, and I think they would do a lot better under the system I’m proposing.

Meanwhile, the lengths we go to enforce copyright are absurd. I mean, you have schools now where, at the insistence of the recording industry, universities give their students lectures on the importance of respecting copyright. There was a woman in Minnesota who ended up paying a $220,000 fine because she was allowing people to download music through her computer. That’s nuts.

THE STRADDLER: There is the famous line in Keynes about exterminating the rentiers. Is your thinking on patents and copyrights aimed at getting rid of those who are rent collectors on intellectual property?

BAKER: Well, I certainly hope it has that effect. We want to promote innovation and creative work. I see patents and copyrights as relics. I began by saying that these date back to the Middle Ages, which doesn’t in and of itself mean that they’re bad—but it also doesn’t mean that they’re good. The question is, can we find a better way?

I understand people’s reluctance to jettison something like the patent system, through which we have developed a lot of good drugs. That’s why I’m proposing doing something that will compete with the patent system. I’ve argued with people in the drug industry, and I remember one person saying that what I was proposing sounded like defense contracting. Okay—but we actually have a very strong military. And in the pharmaceutical realm, the big advantage we would have is that there is no basis of secrecy. I mean, in defense, we’re designing all these weapons so, sure, we don’t want everyone in the world to know what they are and how they work. But there’s no reason not to put your latest results for an AIDS drug or a cancer drug on the web. Someone else will use it and develop it first? Great! Yes, it would be like defense contracting—except that we’ll have the benefit that there’s no excuse for secrecy.

[1] Baker, Dean. “First, Stop Destroying Jobs.” The New York Times. 6 September 2011 (Updated 3 August 2012).

[3] The General Agreement on Tarriffs and Trades (GATT) was a multilateral trade agreement signed in 1947 between twenty-three nations. In 1994, the so-called Uruguay Round of GATT negotiations between 123 nations led to the creation of the World Trade Organization (WTO), which officially came into existence on January 1 of 1995.

[4] For details on this case, see, for example, Wingfield, Nick. “Jury Awards $1 Billion to Apple in Samsung Patent Case.” The New York Times. 24 August 2012.