Patents are an artificial construct designed to reward innovation by banning mimicry. They are not in any way ‘natural’ and are in effect a legal monopoly to certain industries, with the expectation being that the reward to society as a whole will be larger than that under a no patent system (because there will be more innovation and thus more innovative new products that are a benefit to society).
Ignoring for a moment whether that’s true or not (there’s no compelling evidence that it is), surely this compact between the State and the relevant Industries means that there is an expectation that the granting of a legal monopoly is only valid for so long as monopoly profits are not sought and social benefit > social cost?
Spending on R&D (as a proportion) has been dropping precipitously since the 1990s and continues to do so. Profits have continued to rise (both proportionally and as an absolute amount).
The justification of and premise for granting legal monopolies is clearly gone.
Why haven’t patent laws been changed (whether breadth/scope, or strength)? Why hasn’t evergreening been tackled? Why are generics still constantly tied up in fallacious legal arguments designed not to win but to delay? Etc etc.
As for the argument that patents encourage innovation and/or provide net social welfare society:
How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World Fairs
Do Patents Perform like Property?
[quote]In any case, the empirical economic evidence strongly rejects simplistic arguments that
patents universally spur innovation and economic growth. The direct comparison of estimated
net incentives suggests that for public firms in most industries today, patents may actually
discourage investment in innovation[/quote]
(Pharma & Biotech were the two industries that made more from patent profits than from patent litigation, but the study doesn’t directly address innovation in those industries)
The Case Against Patents
This is the best study I’ve read on the role of patents in Innovation. It’s relatively short, superbly written and I would encourage anyone to read it. As it’s so good, I’m going to quote in depth.
[quote] It is impossible to study the
history of innovation without recognizing that inventors and innovators exchange ideas as a matter of
course and that secrecy occurs, in those cases in which it occurs, only in the final stages of an innovation
process, when some ambitious inventors hope to corner the market for a functioning device by patenting
it. A good case in point is that of the Wright brothers, who made a modest improvement in existing flight
technology which they kept secret until they could lock it down on patents, then used their patents both to
monopolize the U.S. market and to prevent innovation for nearly 20 years. This is discussed in Shulman
. The role that Marconi and his patent played in the development of the radio is altogether similar –
see Hong  – as are innumerable others. At the opposite extreme we have, again among many, the
example of the Cornish steam engine discussed in Nuvolari [2004a, b]. Here engineers exchanged nonpatented
ideas for decades in a collaborative effort to improve efficiency. The modern and highly
successful open source software movement is a more contemporary example of how collaboration and
exchange of ideas thrives absent intellectual property. How much public benefit of the various patented –
and never-the-less secret – pieces of the Microsoft operating system has occurred? [/quote]
It then goes on to give several examples on how first mover/first to market has been a larger factor in success than in obtaining early patents that restrict entry.
[quote]The relevance of patents in the
pharmaceutical industry – then, and contrary to “Schumpeterian” theories – is most likely not due to the
high fixed costs but rather the fact that disclosure in the case of drugs is more meaningful than in that of
cars and most other products. The chemical formula and the efficacy of the cure as established by clinical
trials are available to competitors essentially for free and it is the second (a public good, privately
produced due to a political choice) that accounts for about 80% of the initial fixed cost. On the other side,
the downstream cost of monopoly pricing of pharmaceutical products is much higher for life-saving
drugs, and the cost of monopoly pricing of other pharmaceutical products is also quite high. Hence
various economists, holding differing views about intellectual property, have nevertheless argued that if
government intervention is indeed needed in this market a system of prizes would be far superior to the
existing system of monopolies.[/quote]
[quote]We have made mention of the loss
of human life due to the pricing of AIDS drugs. More revealing is the empirical study of the Quinolones
family of drugs (Chaudhuri, et al. ). It measures the economic consequences to India of the
introduction of pharmaceutical patents for this family of drugs and concludes that the consequence to
third world India will be nearly 300 million USD in welfare losses – while the gain to the first world
pharmaceutical companies will be less than 20 million USD.[/quote]
Pharma patents increase net social welfare?
The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues
[quote] This paper examined the impact of changes in
patent policy on innovation. Rather than analyzing a single case, I studied 177 of the most significant shifts in patent policy across 60 countries and 150 years. Adjusting for the change in overall patenting, the impact of patent protection enhancing shifts on applications by residents was actually negative.[/quote]
From [this] (http://www.economist.com/node/21660559) Economist article;
[quote]However, the history of the industry raises doubts about such arguments. Until 1967 German drug companies could only patent the way they made drugs, not the formulae of the drugs themselves. Anyone could sell copies of the medicines if they found another method of making them. Yet Mr Boldrin and Mr Levine say German drugmakers produced more innovations than British ones (remember where aspirin was invented). Another interesting case is Italy, which had no patent protection for drugs until 1978. One study showed it invented a larger proportion of the world’s new medicines before that date than afterwards. Before the “reform” it had lots of copycat firms, but the biggest of these also did research on drugs of their own. They were largely wiped out once they had to pay royalties on their copycat drugs.
It is true that, encouraged by the prospects of patents, pharma companies do a lot more research today than in the 1960s and 1970s. But it is also true that they are not alone in their endeavours. Public support for biomedical research has soared over past decades; the budget of America’s National Institutes of Health is five times what it was in 1970. Mr Boldrin and Mr Levine reckon that once subsidies and tax breaks are accounted for, American private industry pays for only about a third of the country’s biomedical research. In return the patent system provides them with a great deal of income.[/quote]
[quote]America’s health systems, he noted, spent $210 billion on prescription drugs that year. Based on how much cheaper generic drugs were than patented ones, Mr Baker calculated that a competitive patent-free market might have provided the same drugs for no more than $50 billion. That represented a saving of $160 billion.
The drug companies reckoned at the time that they were spending $25 billion on R&D; the government was spending $30 billion on basic medical research. The money it would have been able to save buying drugs for Medicare and Medicaid in a patent-free world have allowed the government to double that research spending, more than replacing industry’s R&D, while still leaving $130 billion in public benefit.
With America’s prescription-drug bill now $374 billion, the opportunity looks all the greater, even though the companies now say they are putting $51 billion a year into R&D. Imagining that the government could spend R&D money as effectively as the corporate sector may sound like a stretch. But a government which simply wanted to make drugs available for competitive manufacture might find various ways to get innovative results from contract research companies. Joseph Stiglitz, an economist at Columbia University, and others have suggested encouraging teams of autonomous scientists to develop new breakthrough drugs by offering those that succeed big prizes.[/quote]
There are plenty of economics articles on the positive effect of patents on r&d and innovation, as well as (fewer) economics articles on the negative effect. However, they all rely on arcane statistical models and formulae to derive their significant results and I genuinely believe they offer no real value in this argument. I have read several thousand (mostly banking) economics papers based on incredibly complex modelling, and they are inevitably invalidated by real world data and experience later on. Rather than being descriptive or informative, they ever try to be prescriptive. The banking crisis in particular destroyed almost 20 years of self-congratulating economics ‘research’ and left the whole field in near tatters.