Whether civilization can survive the 21st Century is an open question. The triple challenges of slowing economic growth, depopulation, and climate change, threaten humanity’s survival.
I contend that the key to overcoming these challenges requires unlocking new technology at a pace much faster than we did in the 20th Century. The problem is that the political institutions and policies intended to encourage innovation remain woefully outdated. The path forward requires a new approach.
Policymakers have long sought to incentivize technological progress through policy. These efforts generally fall into two categories: Patents and Direct Investment. Both approaches are highly imperfect, but useful means of encouraging innovation for the benefit of society.
A patent is government-granted legal protection, often for 20 years, that gives an inventor the exclusive right to profit off an idea, thus encouraging future innovation in pursuit of this exclusive royalty.
With Direct Investment, on the other hand, instead of granting a royalty to the private sector, the government itself subsidizes research using taxpayer dollars. Often, the fruits of this research would be placed into the public domain, royalty free for anyone to use.
Both approaches come with limitations. Patents create just as many barriers to innovation as they solve. As an example, monopoly (royalty)-pricing of AZT, a drug used to treat AIDS, prices many people in developing countries out of treatment, leaving millions of children with preventable illness worldwide.
Patents also incentivize duplicative research as competitors attempt to “patent around” existing patents to avoid the royalty, creating immense waste in research and development dollars. Meanwhile, patent “trolls” file and hold patents, not in the name of innovation, but as weapons in lawsuits designed to extract money from the innovators themselves.
Even then, patents still fail to provide truly sufficient incentive for innovation. Even at monopoly pricing, patents do not fully reward researchers for the positive externalities of their work. Indeed, studies suggests that the social return is around twice the private return. In short, patents leave innovative capacity dormant.
Direct Government Investment can help mitigate some of these drawbacks by ensuring that the fruits of all taxpayer-funded research goes directly into the public domain for anyone to use. But as with anything that is government directed, spending is often politically influenced and inefficiently allocated.
A New Path Forward
There may be a better way to encourage innovation. One such path, as I wrote before, is the use of patent buyouts. A second potential solution, which we will discuss here, is the use of Harberger taxation.
The overarching issue with patents is that we want to encourage the positive externality of new innovation, while discouraging blind rent-seeking.
The solution, therefore, can be to impose a regular tax on the value of the patent to discourage rent-seeking behavior. The challenge lies with accurately assessing the value of intangible property. That’s where Harberger taxes come in.
Harberger taxes allow the owner of a property to self assess its value. To prevent owners from assessing the value too high, a regular tax must be paid annually on the assessed value. To prevent owners from valuing the property too low, the catch is that anyone can buy the property at the assessed value at any time. These constraints force a broadly honest valuation.
The tax will discourage patent trolling by imposing a cost on sitting and holding patents unproductively. Honest valuations will also make the market for ideas more liquid and reduce the incentive to “patent around” royalties.
Going one step further, the government can still play the role it plays with patent buyouts. Using receipts from recurring IP taxes, the government can set up a panel of experts that review patents as they come in. This independent panel will selectively buy IP that would be uniquely beneficial to society and put it into the public domain.
Such a system would reward innovators, discourage rent-seeking behavior, be deficit neutral, while still unlocking select IP for the societal good. Patents as we know them would be killed, but society and the economy would be all the better for it.
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