Innovation and its Discontents

36 Pages Posted: 23 Jan 2013

See all articles by Adam B. Jaffe

Adam B. Jaffe

Brandeis University; Motu Economic and Public Policy Research; National Bureau of Economic Research (NBER)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Abstract

Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.

From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison's light bulb and the Wright brothers' airplane to the cell phone and Prozac were developed.

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it.

Examples of dysfunctional patent behavior have become staples of the business and popular press. They range from the amusing and economically irrelevant, to not-so-funny cases that seriously threaten important technologies in important industries:

• Patents on inventions that are trivially obvious, such as the "Method for Swinging on a Swing," "invented" by a five-year-old, and "User Operated Amusement Apparatus for Kicking the User's Buttocks" ("invented" by a supposed grown-up); • Patents in areas new to patenting, but covering purported discoveries familiar to practitioners and academics alike, such as Amazon.com's attempt to prevent Barnesandnoble.com from allowing customers to buy books with a single mouse-click, and a bright MBA student's patents on an option-pricing formula published in the academic finance literature two decades earlier; • Patents that have become weapons for firms to harass competitors, such as the decade-long effort by Rambus, a semiconductor designer, to control computer memory technology by making sure that a long string of patents, all derived from a single 1990 patent application, incorporated important features of an industry-wide standard developed through a voluntary industry standard-setting association.

To major recent policy studies by the Federal Trade Commission (U.S. Federal Trade Commission, 2003) and the Board on Science, Technology and Economic Policy of the National Research Council (Merrill, Levin and Myers, 2004, cited hereinafter as "STEP Report") have recommended significant changes to address these issues. In this paper, we provide an overview of the issues and discuss possible changes to address the widely perceived shortcomings of the current system.

Comments on this paper can be found at: http://ssrn.com/abstract=2205986

Suggested Citation

Jaffe, Adam B. and Lerner, Josh, Innovation and its Discontents. Capitalism and Society, Vol. 1, Issue 3, Article 3, 2006, Available at SSRN: https://ssrn.com/abstract=2205904

Adam B. Jaffe (Contact Author)

Brandeis University ( email )

Waltham, MA 02454-9110
United States
781-736-2251 (Phone)
781-736-2263 (Fax)

HOME PAGE: http://www.brandeis.edu/global/people/faculty/jaff

Motu Economic and Public Policy Research ( email )

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P.O. Box 24390
Wellington, 6142
New Zealand

HOME PAGE: http://motu.org.nz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Josh Lerner

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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