A World Without Patents

This past weekend I went to the SEA conference in DC and had a wonderful discussion with economist Howard Baetjer of Towson University.

Howie wrote a wonderful article in the Review of Austrian Economics called "Capital As Embodied Knowledge" (pfd here). Capital, he says, get its value because it's infused with knowledge, thus other people can use it even if they don't understand the technology. I can use my car even though I can't even change my oil. If I had no knowledge of how computers work, I could still use one just fine.

We got to talking about patents and how screwy they are. For a long time I always figured patents as a necessary evil. Yes, they are subject to terrible abuse but I couldn't think of an alternative to protecting intellectual property. He suggested re-enginneering, say software, to encrypt it better so its patent is protected.

This is where it gets really interesting. I realized that what he's proposing is the seperation of service (what the technology does) and technology (how it works). This is what patents basically do: seperate service from technology. Patents allow people to enjoy what a technology does but disallow the replication of that technology. Firms cannot "reverse-engineer" a patented item (usually). But if there were no patents, they could (and do).

In a world without patents, the costs of reverse engineering is their grace period (not the length of the patent). Thus, I propose firms will adjust their behavior to get the most out of the technology they developed.

First, they will attempt to make it as hard as possible to reverse-engineer the product by doing extra work to seperate service from implementation. I call this practice "black-boxing" because you want to turn your product into a "black box;" all the people know is what comes from it (the service), not how it works (implementation). We can imagine firms hiding circuts, creating false relays, adding "self-destruct" programs (overheat the circuts if the case is broken) and maybe even coating the inner-casing with a tough structure that's physically hard to remove.

Second, firms will engage in multi-incremental technology growth. With patents, marketing the absolute latest makes sense because no one else can make that technology. Without patents, firms will not release a product the moment they perfect the slightest improvement because that will be easy to reverse-engineer. Instead we'll likely see new products that not only contain generations of a particular improvement, but several of them at once. With all these leaps in one product, it becomes exponentially more complex to figure out how it works. (Think of the difference of giving a six-shooter to the founding fathers and giving them a machine gun.)

Third, firms will reduce their prices faster for new technology because they want to get a bigger foot in the door. With patents, they have greater monopoly power (because they know when their power ends). Without patents, their length of their monopoly power becomes uncertain; it would be as if they are competing with a company even before they replicate the technology.

Fourth, all of these things will encourage corporate espionage, and that's just cool.

Fifth, there will be more focus on technology with greater originality and novel approaches. Reverse-engineering such technology is harder because you're less certain where to start.

All of these things would, of course, increase the costs for firms, (just like removing a licensing law increases the costs). I do not think firms will embrace this change in law. However, it is possible it could work in their favor if they black-box and spy well enough.