Steven Landsburg describing a great idea:
The problem with patents is that they reward good behavior (that is, inventiveness) with a license for bad behavior (that is, monopoly pricing). It's rather like rewarding good samaritans with licenses to drive drunk. Surely there's a better way.
Kremer's proposal is essentially this: When you design a better mousetrap, we grant you a patent. The next day, the government purchases the patent for a fair market price and puts it in the public domain. The inventor gets his reward, and the rest of us get to buy goods at competitive prices. We pay through the tax system only what the inventor would have extracted from us anyway, and we get the additional benefits of competition: more mousetraps are built, and more inventors can start piggybacking on the idea.
The sticking point is determining that "fair market price". But Kremer has solved that problem: First we grant the patent. Then we auction the patent to the highest bidder. As soon as the auction ends, the man from the government arrives and flips a coin. If the coin comes up heads, the auction winner completes his purchase; if it comes up tails, the government buys the patent for the amount of the winning bid. Bidders have every incentive to bid judiciously because the coin sometimes comes up heads. But this way, half of all patents end up in the public domain, which is halfway toward solving the problem.
That's the naive version of the plan. In the sophisticated version, the man from the government flips a weighted coin, so that he wins 90% of the time. (You can't go all the way to 100% or bidders will have no incentive to perform their due diligence.)
What about collusion in the auctions? Kremer's solved that too. Read his paper or my book for the details.
The benefits from Kremer's plan would be so phenomenally huge (think about having 90% of all prescription drugs sold at competitive prices) that I cannot imagine why it wasn't adopted the day he proposed it. I just don't see the downside.
As both an engineer and an economist, I love this idea! It seems like it would still provide strong incentives for innovation as the current patent system. (Perhaps even stronger incentives than the current patent system because the inventor merely has to bring a patent to auction rather than try to find a businessman and/or venture capitalist to turn his invention into reality.) It may cause some technologies to move towards trade secrets rather than patents, but I don't see this as a major effect on innovation and expect the auctioning system would help increase innovation rates.
The only other potential downside I could see is that the increased competition may lower the value of each patent and people would take this into account in their bids in the auction (and in their investments in innovation). Since others would soon innovate off of this design, that design would probably be viable on the market for a shorter span of time, meaning less time to reap the rewards of innovation.
My hunch is that the benefits would still outweigh the costs. Does anyone see any other problems with this idea that I might be missing?
2 comments:
This is the most ridiculous, convoluted scheme I've come across in a long time.
First, it involves getting government involved even moreso in the free market system. That usually doesn't work so well.
Second, notice the statement rather flippantly inserted into the argument: "We pay through the tax system only what the inventor would have extracted from us anyway..."
I say, whoa...wait just one minute there. This is such a poor assumption that is seems shocking. Basically, the author is saying that the costs are now distributed to all taxpayers, rather than just those who would choose to consume the product. So my tax dollars now pay for the next Apple patent, whether I buy that device or not. That's a rather radical redistribution of costs. To assert that the costs are distributed the same is ludicrous.
Third, if the benefit is that consumers do indeed pay less for newly invented products, then this by definition means that the inventors will get paid less. There's no way that you can have one without the other. So, if indeed 90% of prescription drugs end up being sold at far lower "competitive" prices, that de facto means that the pharma companies don't make as much money, and hence have less incentive to innovate. Now you may argue that the outcome is still desirable by a concept of "fairness" but then you just may as well place price controls on prescription drugs, or limit patents altogether.
In short, the author may as well join the Socialist party for trying to foist on us another scheme to limit pricing and redistribute wealth, just couching it in a more confusing and seemingly market oriented approach.
Of course I don't think the author is a Socialist. I think he is a "pop economist"...and like the pop psychologists, he is paid more to be provocative rather than offering deep insights or solutions. Let's face it...he keeps throwing these ideas out there to sell books and book speaking engagements. Perhaps he should limit the price on his book, so that 90% of them are sold at "competitive prices." I have a feeling that if such a scheme were applied to the selling price of his next book, he wouldn't be so ardently in favor of it.
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