Whether or not civilization can survive the 21st Century is an open question. As humanity lumbers through the 2000s, the growing challenges of slow economic growth, disadvantageous demographics, and climate change, threaten our survival.
The key to solving these problems is innovation. We must innovate and develop new technology at a pace much faster than we did in the 20th Century. But the creaky political institutions designed to encourage innovation are stuck in the last century. The path forward requires a new approach.
Imperfect, Inefficient Success
Governments have long sought to incentivize technological progress through public policy. These efforts generally fall into two categories: Patents and Direct Investment. Both of these approaches are highly imperfect, but nonetheless useful means of encouraging innovation for the societal good.
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 legal royalty.
Direct Investment, on the other hand, is an important but often forgotten means of supporting innovation. Instead of granting a royalty to the private sector, the government itself subsidizes research directly using taxpayer dollars. Sometimes, the fruits of this research would then be placed into the public domain, royalty free.
Limitations
While certainly useful, patents create almost as many problems as they solve. They incentivize new ideas and innovation, but then prevent society from fully benefitting from them. As an example, patent monopoly 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.
The societal benefit of opening up the AZT patent would be advantageous to us all, but would also discourage innovation by eliminating the incentive to have developed the drug in the first place.
Further, patents encourage wasteful R&D as companies attempt to circumvent royalty fees. Researchers will often develop similar technology and “patent around” existing patents, creating immense waste in research and development dollars.
All told, patents still fail to provide truly sufficient incentive for innovation. Even at monopoly pricing, patents fail to fully reward researchers for the positive externalities of their ideas, as they are ineffective at completely capturing this surplus. Indeed, studies suggests that the social return is, on average, around twice the private return.
In short, patents protections are better than nothing, but inefficient in what they do, and leave a great deal of innovative capacity dormant.
Direct Government Investment can help mitigate some of these problems 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.
To improve government-funded R&D, we propose setting up a commission based on the DARPA model that would limit political influence, and focus attention on research that benefits humanity in the long term. This commission would compliment, not compete with, the private sector.
As for the private sector, however, there may be a way that can overcome the limitation of patents and accelerate innovation: Patent Buyouts.
Patent Buyouts
Patent Buyouts leverage the power of open-sourcing most patents through government money, but do so by purchasing the output of research, rather than inefficiently directing money at the input.
How does this work in practice? Anytime one files a patent, it would automatically go up for public auction. The auction would be a Sealed Bid Second Price Auction (SBSPA). In the SBSPA, bids are submitted in written form without knowing the other bids in the auction. The highest bid wins, but only pays the second highest bid’s price.
Unlike a first price auction, where bidders are trying to guess what others are bidding, the SBSPA incentives bidders to bid the patent’s true value only. Participants post the maximum they are willing to pay for the patent, immediately, rather than trying to outsmart other bids.
In most cases, the government too would submit a bid. The government’s bid, however, would take the private value of the patent (as determined by the auction) and add a multiplier to fully incentivize research. The data suggests that the social rate of return on R&D is about twice the private rate of return. Thus, a multiplier of 2 should roughly account for the positive externalities that the private market cannot effectively absorb.
By default, the government’s bid would always win the auction. The patent holder could elect to sell or to retain the patent. If sold to the government, the patent will be placed into the public domain for the benefit of humankind. If not sold, the patent may then be subject to an annual IP tax based on a percentage of its auction value.
To keep private bidders honest and ensure that their bids are genuine, the government will step aside on random auctions, forcing the highest bidder to take on the patent at the price they had bid. To prevent collusion between bidders, the government might base its bid on the third-highest bid, requiring dishonest parties to bribe three companies rather than two, making collusion much more difficult and dangerous.
Daguerreotype Photography
The key of a patent buyout is the ability to “open source” most patents, placing them into the public domain where the benefits of the idea can be easily diffused. This has historical precedent in Daguerreotype photography.
In 1837, a new technology arrived on the scene: the ability to take photographs. The government of France recognized the monumental importance of this new capability and made the decision to purchase the patent and place it into the public domain. Now free to use and improve by anyone, the technology rapidly spread across Europe.
Within mere months, the process was translated into dozens of languages. Chemists from all across Europe rapidly improved upon the technology, and photography changed history the world over. Patent buyouts on a mass scale have the potential to dramatically alter the course of human history.
Supercharging the Future
Using a societal benefit multiplier, we can internalize positive externalities back onto the researchers themselves. This will provide unprecedented incentive to innovators to spend money and take risks developing new pharmaceuticals, transportation, energy technology…etc.
At the same time, by releasing most patents into the public domain, society gets the immediate benefit of the fruits of their work without duplicative and wasteful spending. Further, immediate access to cutting-edge research will enable follow-on technology to grow and mature more quickly.
The challenges that lie ahead are as much political as they are technological. If humanity is to be able to overcome the challenges of the 21st Century, then it must first learn to overcome the thinking of the 20th.