Supercharging Innovation
Supercharging Innovation
Unlocking tomorrow's civilization today
The triple challenges of slowing economic growth, depopulation, and climate change, all threaten humanity’s survival. The key to overcoming these obstacles requires unlocking new technology at an accelerated pace. The problem is science is hamstrung by outdated institutions and policies. In what is an ongoing quest to bring some viable solutions together, I have charted some possible pathways to accelerate the pace of technological advancement.
Promoting Innovation
Innovation is difficult, not only because it often requires a heavy investment of time and money, but also engenders a significant risk of failure. Aside from “first mover advantages,” absent any incentives for spending that time and money, it is rational for inventors to wait for someone else to invent something, then copy it.
Of course, in a world of copycats, little progress is made. So policymakers have sought to incentivize technological progress through policy. Generally, these incentive structures have fallen into three basic categories: Direct Investment, Prizes, and Patents.
Direct Investment, which I delved into here, uses taxpayer funds to subsidize the development of new technology. Often, the fruits of this research are placed into the public domain for anyone to utilize. As with anything that is government-run, however, Direct Investment spending can be politically influenced and inefficiently allocated.
Prizes have historically had some success in promoting breakthrough innovations. In a prize system, the government or a third party sets out a goal with a pre-prescribed award, often monetary. The first participant to achieve the goal receives the award.
The Longitude Act of 1714, for example, offered a £20,000 prize for a practical method of determining longitude to a half degree accuracy at sea. The prize spurred innovation in timekeeping and ultimately made sea navigation much safer and cheaper.
Prizes have their drawbacks too, however. Specifically, they require the prize-issuing authority to be able to foresee what innovations society needs, and devise a method of compensation that will be sufficiently enticing and motivating. This requires information that a third party may not possess.
As a consequence, patents have become humanity’s preferred mechanism of innovation promotion. A patent is a temporary government-sanctioned monopoly on an idea, often up to 20 years. This monopoly gives an inventor a temporary exclusive right of profit, after which the idea is placed into the public domain for anyone to use and improve upon.
The Problem with Patents
Patents create almost as many problems as they solve. They incentivize innovation but then prevent humanity from fully reaping the benefits of new ideas. As just one example, patent pricing of AZT, a drug used to treat AIDS, prices many people out of treatment and leaves millions of children with preventable illnesses.
Patents can also perversely incentivize duplicative research, as competitors attempt to “patent around” existing patents to avoid paying royalties. This creates immense waste in research and development dollars. Worse still, “trolls” file and hold patents, not in the name of innovation, but by exploiting ambiguity and the high cost of litigation to extract money from the innovators themselves.
Patents largely lockout follow-on innovation. With monopoly pricing, the cost to buy or license a patent is such that most cannot afford to do so. As a consequence, would-be innovators, ready to improve upon an idea, remain on the sidelines for years, if not decades, until the idea enters the public domain.
Lastly, patents still fail to provide truly sufficient incentives for innovation. Even at monopoly pricing, they do not fully reward researchers for the positive externalities of their work. Indeed, studies suggest that the social return is at least twice the private return. In other words, patents are still leaving innovative capacity dormant.
Pathways Forward
Some have argued that it might be better to abolish patents entirely, but research suggests that this may be counterproductive. Typically, the cost of developing a new idea or product is high, while the cost of producing copies is comparatively small. In a world without patents, copycats can produce an idea near marginal cost, leaving the inventor unable to recoup their R&D expense. Absent patents, most will rationally choose not to innovate.
We can double down on alternatives that we know work, employing a blend of enhanced Direct Investment and Prizes to reduce dependence on patents in the first place. Ideally, as we discussed here, Direct Investment would be targeted at the bridge between basic and applied research through a DARPA-like organization, avoiding direct competition with the private sector, focusing instead on a complementary role by investing in areas that are deemed too risky, and/or returns too distant.
We could also employ the use of prizes and/or tax incentives to motivate the market. Cash prizes could be offered for socially beneficial innovations like life-extension medications or reusable rocketry. Crucially, however, when fully funded through Prizes or Direct Investment, the fruits of this research should be placed immediately into the public domain.
The above incentive structures, however, would likely still leave significant gaps in the innovation infrastructure. These gaps require us to explore more creative means of improving patents.
A Harberger Tax
One idea I have seen kicked around is a Harberger Tax on patents. Patents are legal monopolies, the monopoly protection enjoyed by the inventor is a pure creation of the sovereign state. As such, it may be socially optimal to reframe patents as partially publically owned. The private owner has the right to profit from his idea but must share a portion with the sovereign authority that made this possible.
A small annual tax can transform patents from a monopoly into partially publicly owned property. The challenge lies in accurately assessing the value of the IP. That’s where Harberger taxes come in. To determine that valuation, we turn to those who have the best information: the IP owners themselves. They self-assess the value, and the government charges the annual tax based on that value.
Now, you’re probably thinking, won’t IP owners asses the value low so as to reduce their tax burden? They certainly will, which is why anyone can buy the IP at the self-assessed value at any time. The combined constraints of self-assessment and a recurring tax force a broadly honest valuation.
A patent holder for a widget, as a hypothetical example, might want to value their patent at $10 billion to prevent anyone from buying it. But with a 0.5 percent annual tax, for example, they would have to pay $50 million a year at this valuation. Instead, they will rationally choose a realistic $100 million valuation, incurring a reasonable $500 thousand annual levy that is worth paying because the patent still nets a profit.
Crucially, this recurring tax would discourage rent-seeking behavior, including patent-trolling, by imposing a cost on sitting and holding patents unproductively. It would also shake up the IP market, making it more liquid. If a company needs a patent, it can buy it at a reasonable price, no longer having to wait until the idea enters the public domain.
The self-assessment system would also greatly simplify and reduce the cost of IP litigation. In infringement cases, courts’ roles would be limited only to adjudicating whether or not an infringement took place. They would be freed from the arbitrary task of determining the damages suffered, as this number would be publically available.
Patent Buyouts
Alternatively, the most popular “solution” to the patent problem was proposed by Michael Kremer in 1997: Patent Buyouts. In his proposed system, an auction is used to determine the value of a patent, which the government then buys and open-sources. As opposed to Direct Investment, the government purchases the output of research, rather than directing money at the input.
This has a historical precedent with Daguerreotype photography, invented in 1837, the first means of taking photographs. The government of France recognized the monumental importance of this new technology and made the decision to purchase the patent and place it in the public domain.
Now free to use and improve by anyone, the technology rapidly spread across Europe. Within mere months, the process for taking photographs was translated into dozens of languages. Chemists all across Europe quickly improved upon the technology, far faster than they would have if the patent had not been unlocked.
How would patent buyouts work in practice? Anytime a patent is filed, it would automatically go into a public auction. The auction would be a Sealed Bid Second Price Auction (SBSPA). In an 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 bidder’s price.
Unlike the traditional first-price auctions where bidders are trying to guess what other parties are offering, the SBSPA incentivizes participants to bid the patent’s true value only. An honest and true valuation is crucial to the smooth functioning of the system. The key is that the government would also submit a bid, but the government’s bid would take the private value of the patent, determined by the auction, and add a multiplier.
Why? As previously noted, patents create positive externalities that cannot be fully captured privately. If they could, inventors would be better incentivized to innovate even more. The data suggests that the social return on R&D is at least twice the private return. Thus, a multiplier of 2x should roughly account for the positive externalities that the private sector cannot effectively capture.
By default, the government’s bid would win the auction. The patent holder could elect to sell or retain the patent. If sold to the government, the patent will be placed into the public domain for the benefit of humankind. The beauty of patent buyouts is that inventors will be fully rewarded for the positive externalities of their work, while society simultaneously gets to immediately enjoy the fruits of new ideas.
The problem with an auction system, however, is that it may be vulnerable to manipulation. Since the government is buying patents at a significant markup, there is a huge risk that bidders and inventors will collude, either explicitly or implicitly, driving up patent valuations and forcing the government into excessive and wasteful spending.
Kremer recognizes this and suggests that, to keep bidders honest, the government step aside on random auctions, forcing the highest bidder to take on the patent at the price they had bid. As an additional measure to prevent collusion, the government might base its valuation on the third-highest bid rather than the second, forcing the cooperation of three dishonest parties rather than two, making collusion more difficult.
Toward a Practical Alternative
I have long written off the idea of patent buyouts as workable. It is simply too easy for three CEOs to meet on a golf course and arrange a patent pumping scheme that would net billions in unearned profit, even if they occasionally would take losses. Additionally, there is a serious question as to whether such a system could ever be affordable.
In 2019, the United States spent $667 billion on R&D, both privately and publically funded. Even if we assume, as is highly unlikely, that this R&D is not profitable and only has aface value, a 2x buyout markup brings total spending to ~$1.3 Trillion annually. But in a world with patent buyouts, we should expect more patent generation…a lot more. Even without collusion, a patent buyout system could cost trillions every year.
Ultimately, that may be a price worth paying as accelerating innovation is good in itself, but this is a question for smarter minds. In the meantime, is there a means of building a patent buyout system that is fiscally sustainable? Perhaps it’s possible to blend Harberger taxation with Kremer’s buyouts into a workable, if imperfect, solution.
It is probably worthwhile, as we discussed here, for the government to subsidize R&D. That subsidy would come with the caveat, however, that the fruits of that R&D must be patented and self-valued. This may seem counterintuitive, as the goal is to reduce the dominance of patents, not increase them. But we don’t want inventors hiding from the Harberger tax by keeping their innovations secret.
We want the diffusion of technology, but we don’t want rent-seeking. A low Harbeger tax of, perhaps, 0.5 percent would likely be enough to discourage most patent trolls and rent-seeking. The tax surely would dampen innovation incentives a bit, but this would hopefully be counteracted with input subsidies.
The taxes would raise some revenue, not enough to be neutral, but enough such that billions could be recycled back into subsidies and somewhat defray the cost of the system. The tax would also, as previously mentioned, make the patent market more liquid and simplify IP litigation.
The self-assessed values would also form a benchmark for a buyout system in the spirit of Kremer’s, but one that is more targeted and less subject to manipulation. Instead of buying most patents, the government would buy only a select minority of patents that it deems socially beneficial to do so.
Because most patents would not be purchased and the remainder would be subject to a recurring annual levy, the incentives structure no longer lends itself to manipulation as attempts to game the system would only result in financial losses.
Supercharging the Future
Thus far no system proposed, whether it be prizes, patents, or direct investment, has fully and correctly incentivized inventors while remaining financially sustainable. Perhaps someday someone will come up with a viable alternative that maximizes innovation.
In the meantime, my proposal seeks to balance incentives as best we can. Providing motivation for inventors to innovate while also creating a buyout mechanism that enables some ideas to be opened up to the public. It creates a semi-liquid patent market that discourages rent-seeking and duplicative R&D.
Combined with subsidies, prizes, and grants, this balanced approach would seek to at least double, if not triple, or quadruple, total R&D funding, from the current ~3.0 to 6-12 percent of GDP. Such an expansion in funding would have a profoundly positive impact on humanity. With armies of scientists developing breakthrough cures for disease, new materials, more efficient forms of propulsion…etc. economic growth and global productivity would surge. Instead of timidly stumbling, humanity would sprint bravely forward into the 22nd century.