Part II – Arguing the Patent-Framework

In the original article on the patent-framework I summarized a few points that provided a basis to conclude (1) the current patent-framework is flawed, (2) put forward two preconditions that policy-revisions must meet, (3) defined a proposal to change the patent-framework, and (4) briefly explained why such a change will stimulate progress.

Most people consider patents to have emerged as a means to stimulate inventions. However, this is not the case. Originally, patents have emerged in a two-fold manner. Patents emerged as a reward for providing products or services that were thought of as strategically important (to the kingdom), not necessarily new. Beside, patents (in Italy and England, but also as guilds in the Netherlands) emerged as a means to limit competition and favor some people. This was nothing different, and still is not any different, than a pure form of state-initiated discrimination.

Patents eventually were set – for a period of time, nowadays 20 years – to accommodate inventors to profit from their inventions exclusively. The element of new (to the marketplace, or more practically, new to the patent registry) was added. But, the element of exclusivity remained institutionalized.

For those who have not read the original article, my proposal is to change the properties of patents. Nowadays, patents provide businesses the exclusive right to exploit an invention commercially for a period of 20 years. I propose to eliminate the element of exclusivity. Only this way it becomes possible for everybody who wants to use the underlying concept to do so. But, as a means to reward the inventor nonetheless, the patent-holder is the only producer that is rewarded a (20-year decreasing) (VAT) tax-exemption for the commercial exploitation.

I was privileged to receive ten arguments over the e-mail that do not support my proposal. I summarized these arguments, as well as I summarized the arguments that I see relevant. In this part I discuss the merits of all the arguments made. In table 1 these arguments are summarized and indexed in 6 subjects. Reviewing these arguments is structured along these six subjects.

Table 1: Arguments against and for changing patent-framework

argumenten-patents3

(click to enlarge in a new (tab-)window)

#1 – Patents, High Prices, and Exclusivity

(1) If you find high prices a problem then don’t buy it. (3) Patents, because they provide a monopoly, cause inflated prices.

Considering both statements, it is not a question that prices are higher than they would be under competitive conditions. However, these statements are opposites in terms of defining high prices as a problem. Clearly, if you find high prices a problem you don’t buy the product. It is a rather simple fact of life, it is your right to do so. I cannot possibly disagree with this statement.

In the context of patented products it must be clear that it provides businesses an opportunity to establish market-power. It depends on the range of competitive products available whether there is any competition at all. What I consider a problem is that there are no alternatives to choose from because patents prevent alternative products to become available. Consumers have a choice of buying at high prices, or not buying at all. High prices are artificially induced. There are no alternatives. There is no other marketplace to go to.

(4) New technologies cannot be used freely and it remains a question if they are introduced in the marketplace. Important is the element of exclusivity in the patent-framework. Generally, it is assumed that patented concepts always find their way to the marketplace. This assumption cannot hold.

One of the main problems of the current framework is that the exclusivity clause allows businesses – that have a strategic interest to prevent certain new concepts being used – can prevent their use. Take the electric car for example. This is one of the rare examples well documented. The automotive industry withholds necessary technologies to manufacture electric cars. New technologies have ended up in corporate safes. Genies can be put back in the bottle. This cannot possibly be a policy objective. It certainly is not in line with stimulating innovativeness.

(2) Companies can always compete and can so to receive another patent. This statement is in itself not illogical. But, it is an inductive statement. In other words, there is almost no way of knowing this to be true or false. It is exactly the same problem when I argue that some patented concepts do not find their way to the marketplace. This kind of information is extremely difficult to find. But I did my best and found an example to underline the possibility for companies to come up with competing concepts to patent.

But first, let us suppose the wheel has not been invented, and I invented the wheel, and received a patent for it. As a means to maximize my profits, I choose not to license, but choose to start my own business. As the only producer I sell these wheels at market prices (thus charging monopolistic prices). My business would be extremely profitable. This patent would allow me to hit the biggest jackpot imaginable.

Here is an example of an invention that competes the wheel:

Click to play or visit YouTube: http://www.youtube.com/watch?v=LgbWu8zJubo.

The argument that other companies can compete for other patents is true, but it is question if that competing concept is usable or not. If our patent-framework stimulates innovativeness, it certainly achieves this to some extent. But it remains a question if this is the kind of stimulation we want, and need. Businesses excluded from using techniques have to find other ways to make their products work, but it is a question if it is not stimulating second (or third, or fourth etc.) best solutions. To assess this, research must identify all alternatives available for every patented concept. Good luck to anyone willing to research this.

#2 – Licensing

Licensing can be distinguished in two different categories. As discussed here, the first category focuses on price-mechanism of licensing. Second category is about creating standards. But before these two categories receive any relevance, it is important to consider the motives to license third parties in the first place.

(5) Companies can negotiate in order to use patented products, processes or ideas (licensing). It is argued that patented concepts for products still find their way to the marketplace through licensing. It is fair to point to the possibility of licensing since it is a common practice. But what motives do companies have licensing third parties? Which companies should patent-holders license and at what price?

Imagine you are the CEO of a very large corporation in the business of selling cars. Let us suppose the cars are sold for $100.000. The engineers at your firm came up with an idea to add a patented high-tech device which makes sure this car cannot crash. If any object is closing in too fast, it triggers the device to take over control, and prevent any collision or worse, a crash. This would be a great innovation (and this kind of an innovation was introduced by Mercedes a couple of years ago).

But as CEO, you’ll have to decide whether or not to license this technology. As a competitive player in the automotive industry you question your interest in licensing. Would you license your competitors in the car-business?

Your product, which is qualitatively superior to competitors’ cars, is upgraded with this new device, one that your customers, and potential customers will like very much. It provides your company with a new competitive edge, one that will attract (a slightly) higher demand for your cars. If you license this patent to competitors, it is likely that your company will not attract extra demand. Potential customers have access to this innovation by buying a competitors’ car.

I think it is fair to state that licensing is not in the interest of this company. But let’s suppose this CEO is the utilitarian type of person. This CEO therefore imagines that if the engineers’ solution is applied to all other cars, it enables reducing the number of car-related deaths by (let’s say) 50% each year. But, because your engineers have developed this great innovation, it is rightful to ask a proper compensation for licensing this patented device. What should the compensation be? At what price must this patent be licensed to third parties.

If I were CEO and had to decide on licensing and licensing fees (though I would not consider licensing in the first place), I would make a simple calculation. Suppose I know the number of extra cars demanded because of this device. And suppose I know the profit margin made on each sold car, and exaggerate the profit-margin slightly in favor of my company. Let’s say by a modest 5% (which I of course back up by legal accounting tricks).

Moreover, as CEO, I have developed a superior growth-strategy. The number of cars we sell, increases substantially each year (I would be a great CEO you know). Now, I received a report of my CFO (who is well-known for his superior financial projection-capabilities) that this device increases demand by 10,000 cars initially, with profit-margins in the range of 10%.

As CEO with a great management board we formulated a growth strategy projecting a yearly growth of 10% in the number of cars sold. It means an extra profit of $100 million initially. Our projections conclude, profits increase 10% yearly. Consequently, after seven years profits are doubled to $200 million. After 15 years, it has reached a $298 million, and after 20 years when our patent expired, profits would reach $611 million. In 20 years time, this exercise of wishful-thinking business-strategy, has accumulated profits in the order of $5.7 billion (I told you I would make a great CEO).

What revenue should a licensing-program generate? As a CEO I have to serve shareholder interests (and my bonus). So, if there is any licensing-deal to be made, it must at least generate a couple of billions.

Licensing to competitors is very unlikely. It is a possibility, but a possibility rarely pursued. (6) Patents eliminate competition. Patents are more important as an exclusive right, than they have relevance as a means to cooperate with one another through licensing strategies. And if licensing is pursued at all, my fourth argument comes into play again. (4) New technologies cannot be used freely, and if licensed at all, they come with artificial high prices.

This numerical exercise is an extreme one, but it is known to occur from time-to-time (think Microsoft). Competitors are not likely to buy a license. Rivals probably invest in developing similar devices and come up with their own concepts. It would be a lot cheaper, given that it can be done without infringing the patent. But it remains a question if it can be done without infringing the patent. It surely creates a demand for lawyers.

All by all, the current framework increases total investments to develop innovations, without increasing fruitful results. In other words, investments are undertaken because some concepts cannot be used, making total investments inefficient.

I can only imagine two possible situations in which a management board chooses to license a third party. As it is in the interest of shareholders to increase equity-value, they might explore licensing companies that are (1) not competing the product-line, or (2) are operating in markets where this company has no interest in. Only as long competition is not increased, it would be beneficial for a company to exploit patents through licensing.

(6) Licensing creates standards, so the framework does work. This statement puzzled me. How easy is it to mistake standards with monopolies. A statutory monopoly automatically delivers a standardized product. If companies agree upon using or producing a standardized product (e.g. transport-containers) there is absolutely no need to install a monopoly for it. Standards and monopolies overlap, but are no synonyms in any sense. So, (7) standards are not necessarily monopolies.

Standardization enables a level playing field, contrary to monopolies. Standardization has been around for centuries. A license to use a patented concept is not a precondition to install a standard. It is perfectly manageable to establish standards through simple agreements. Licensing is just one way to establish standards, and a costly one. It is definitely not the only manner to achieve standards.

#3 – Tax Revenues

As a disclaimer I want to stress that I do not consider tax-revenues a priority in any way. Free market capitalism is not about facilitating higher tax revenues. Capitalism is about providing people with economic opportunities, not to restrain these through fiscal policies, nor is it about maximizing tax revenues.

At a first glance it might appear that a tax-exemption – as I propose – causes tax revenues to decrease. This is quite logical since its direct consequence generates less VAT-revenues. But, if it is given a thought, it can be pointed out that total tax revenue eventually increases.

Some important factors determine total tax-revenues. Let’s start with different kinds of taxes levied. With my proposal only one product is exempted from VAT, other products not. But still, this company (or conglomerate of companies) is levied with income-tax, as well as its employees pay income-tax, and depending on the ownership structure of the company, shareholders might have to pay taxes on dividends. From the range of tax-levies possible, only a relative small decrease in total tax-revenue is established.

But, since it becomes possible for competitor firms to enter a market it can be expected that total supplies to the market increase. Despite this causes prices to drop, generating less VAT-revenue per product, there are more products sold, likely generating equivalent levels of tax-revenues. But more importantly, there are more people employed. There are more incomes to tax. All by all, the actual result is that total tax-revenues are positively influenced through stimulating the number of market transactions.

Instead of having one company available to tax there are plenty of businesses to tax. Instead of levying taxes on the employed at one firm, taxes are levied on the employed at multiple firms. Beside, patented products give rise to new product-markets. Any tax-revenue caused by an emerging market is a new source of economic transactions to tax. The statement that (9) there would be little(r) income to tax, is only half right. The statement that the (10) current framework generates lower levels of tax revenues opposed to the proposed adjustment, is more accurate.

#4 – R&D Motives

Motives to invest – specifically in R&D activities – are, and will always remain, a function of potential profitability. But investments are no guarantee for profits. Investments are necessary to remain competitive.

All investments that businesses conduct have two crucial elements. Businesses invest to (1) lower costs (and increases profit margins) and (2) invest in enhancing the attributes of product-lines (increase market share) or create brand new products (create new markets). Investments are strategic means that allow management boards to calibrate competitiveness. Only when a business is competitive, it is able to continue operations and remain profitable.

It is critical to understand that investments act as a means to remain and become more competitive. Investments can create completely new or additional sources to enjoy a degree of market power. Central in this section is the manner in which (new) competitive edges are achieved.

(12) No one will invest in R&D if others can exploit the results of R&D (free riding). This statement is somewhat extreme by concluding no one will invest in R&D. But, it ultimately stresses the importance of a (certain) reward.  This argument has already concluded that if (assumption) rewards are not substantial enough no business will invest in R&D. Moreover, it is suggested that exploiting the results of R&D of other firms can be done without making any costs at all. This assumption suggests that free riding by other parties comes at no costs at all.

Free riding is also in the proposed framework considered a problem, but it does not exaggerate it. There are some aspects of free riding that businesses must consider in any patent-framework.

First, businesses are not obliged to share their developed technologies (potentially patentable concepts). Second, if they decide to patent anyway, they will receive a means to put forward a barrier of entry (an exclusive right or a tax-exemption that allows strategic pricing). Third, businesses that invest in R&D and develop new products have first mover advantages.

(15) First mover advantages provide a far more important motive to invest in R&D. This aspect cannot be neglected. Businesses cannot risk lacking behind, and must invest in their products continuously. Incentives to invest in R&D-programs targeting incremental innovations are always necessary preconditions to remain competitive. Incentives to invest in R&D-programs targeting radical innovations (completely new products) create new product-markets. Being first provide businesses the opportunity to brand a new product (e.g. iPods).

Being first automatically provides a business with a (great) reputation and give rise to a customer-base. First mover advantages are about creating market power through branding and creating brand familiarity. It provides the advantage of market share through having a customer-base along with customer loyalty. As a result of having such advantages, it is very likely that businesses introducing new products become market leaders and enjoy a degree of market power.

As a means to still reward their efforts, society provides them a patent that allows them to increase either their profitability or enhance their market-share. But, at the same time, society demands them to be competitive. In other words, the degree of market power is curbed. (14) Proposal provides sufficient market power to patent-holders to overcome problem of free-riding. Remaining question is if this degree of market power is sufficient. This is discussed in section #5.

Both the current and proposed frameworks reward patent-holders for having invested in developing innovations. The difference between them is that in the current framework patent-holders are in effect subsidized at high cost to consumers, and in the proposed framework they are in effect subsidized by no-one.

It beholds a shift in the paradigm. Either way, society subsidizes inventors. In the current framework, this subsidy is paid for by those buying. In the proposed framework, it is society in a generic manner subsidizing these activities to increase economic efficiency. The shift in paradigm comes down to rewarding competitiveness instead of subsidizing profitability.

(13) It is making intellectual property rights worthless. This proposal does not address copyrights, trademarks and registered brands. It simply is an individual right to claim one’s own work, and exploit this work commercially, whether this concerns a product-name, a song, a movie, or a book.

In this context, there is a very important nuance to be made. There is a very big difference between selling something somebody else produced, which in essence is a stolen product, and selling a product that you actually produced yourself. Eliminating exclusivity in patents is not the equivalent of legalizing selling stolen goods, it is about eliminating the exclusive right to produce a product.

A trademark or a registered brand is not considered a form of market power decreasing economic opportunities. Everybody can come up with their own versions of a book, a brand, a song, a movie, a TV series etc. But to claim the exclusivity how to do this? This kind of a claim on an exclusive right is what is addressed.

#5 – Recovering Investments

Discussing motives to invest excluded the question how much to invest. This section discusses investment funds. Recovering investments is truly the decisive factor. However, questioning the effects on investments is extraordinarily hard to deal with. The problem is that all investment are undertaken given the current business environment. Arguing what happens if rules change, altering the business environment, is therefore somewhat theoretical. But there is plenty of simple theory to overcome this nuisance.

As discussed in the previous section, investments are undertaken to ensure future competitiveness. Only then there is a chance to remain or become profitable. In case of patentable R&D activities it is part of investment considerations to assess potential profits to decide upon the amount of investment funds. The proposed adjustment is undoubtedly leading to lower levels of potential profits. But do lower return on investments automatically mean that it is no longer possible to recover investments?

There are four factors that are relevant discussing the capacity of businesses to recover investments. First, there is the element of timing of changing a legal framework and a business environment. Second, all investments are undertaken with a degree of risks. How do businesses deal with these risks? Third, there is the issue of free riding. Are there no costs at all to free riders or are they simply competitors? Fourth, are there any motives legitimate enough to protect investments? This section discusses these four factors that determine the business environment in which investment decisions are made. Thereafter, the arguments are briefly discussed.

Timing: Announce a new framework (!)

Only when this policy adjustment is implemented from one day to the other, such that companies could not anticipate this change, we will hear “Houston, we got a problem”. If my proposal gets implemented one day, it must be announced at least (let’s say) 5 years ahead. Businesses involved in very expensive research programs must not be confronted with a dramatic change in their business environment. It would make governments unreliable. Businesses must be able to prepare and adapt their investment activities to any change in regulations, and therefore it must be clear that it must be announced long before a new framework becomes in effect.

Risk-assessments: How to deal with risks?

Investment decisions always have to take a risk-assessment into account. This adjustment causes greater exposure to investment-risks since a more competitive business environment is induced. More competition means less market power, and less market power induces lower potential profits. But, incentives and motives to invest still remain part of business environments. Businesses must have competitive edges, there is no question about this.

But what are the risks exactly? When we discuss businesses, it is about them investing a particular sum of money and not be able recovering these costs. In other words, before production facilities are set up, a business has to develop a product it has in mind. The investment risk is enclosed outside the production costs of a product. If this product is too expensive for customers, there is a risk that these investments cannot be recovered. As a consequence, prices do not cover all costs, and consequently, this business has to report a loss. Thus, the higher the investment funds are, the greater the investment risks become. The greater the investment risks, the more necessary it is for businesses to hedge these risks.

Now, there are several manners to hedge these kind of risks. Either investment funds are lowered, or the investment risks are shared. Both strategies lower investment risks.

Most important is that in the proposed framework it is made possible to use R&D results of other businesses. Though businesses might lower their investment funds – possibly leading to fewer innovations – they can enhance their competitiveness by taking advantage of innovations of others, leading to a greater diffusion of existing (and mostly incremental) innovations.

The proposed framework makes it likelier for market participants to share investment risks (particularly for radical innovations) through cooperation. Cooperation in R&D activities can be very attractive since it ensures businesses a strategic advantage: their main rivals are in the same boat. If the boat sinks, they all loose. But if it reaches its destination, they all win. And if they win, society wins. Cooperative R&D ventures create standards (e.g. DVD) at much lower costs.

Important to note in this context is that is not an obligation to cooperate. Not in the current framework, but also not in the proposed framework. If businesses are risk-takers, it is up to them. But key difference with the proposed frameworks is that these risks are not protected by eliminating competition. Nowadays, these risks are subsidized. As a result, business are invited to take risks at costs to society.

Free-riding

Free riders would be market participants that did not invest in developing a new product or technology, but are nonetheless able to use these concepts. This would be a form of investment risk. A free rider is a competitor who is able to produce a similar product, but did not invested in its development. There are two elements of interest, namely competition and the kind of innovation which is used.

Free-rider or competitor?

An immediate question is if ‘free riders’ can become a market participant without having to make costs. If they want to produce a product, they have to attract employment, invest in production facilities and offices. They’ll have to invest in distribution channels, in advertisement, and in product-attributes. The free ride cannot occur without making these costs. In other words, market entrants using technologies developed by others only possess a degree of a free-ride advantage. Beside, they are a second mover at most.

It is a question whether it is even legitimate in the first place to label market entrants a free rider. In essence any market entrant is a competitor. If there is a problem with free riding at all, it is a threat of more competition.

My proposal recognizes a too high degree of free riding a potential problem, but it provides a compensation. A tax-exemption is simply a source of market power to the innovator to use. In other words, first mover advantages are amplified to the extent that a potential ‘free rider’ – a market entrant – is facing a competitor who is able to undercut prices. This tax-exemption provides a compensation of having invested in improving or developing a product. Those businesses who did not invest, do not receive this compensation. In case there is a willing party to enter a market, it faces at least two obstacles.

First, it has to compete the first mover that has had the opportunity to establish (1) a market-share advantage, (2) customer loyalty, through branding (its product-quality) and (3) a price strategy advantage.

Second, it has to invest to produce a similar product that can compete. It remains a question if a potential ‘free rider’ can provide such a product profitably.

It is important to recognize that a degree of free riding becomes part of the competitive race to those investing in R&D. Market entrants become a potential competitive threat, forcing companies to lower their exposure to investment risks. Not to say, they have to lower their investment funds, but it makes strategic alliances for R&D more important.

Free-riding an incremental innovation or radical innovation?

Radical innovations are associated with high investment costs, contrary to incremental innovations that mostly come at relatively low costs. Incremental innovations are follow-up improvements to already existing concepts. Concepts that were once a radical innovation. In case we solely restrict ourselves to radical innovations in regard to the proposed framework it is a simple conclusion that the degree of free-ride advantage becomes relatively high. Investment risks are greater.

As said, the greater the risks, the more necessary it becomes to hedge these risks. R&D activities pursuing radical innovations are, not surprisingly, clustered very distinctively. R&D clusters commonly include academics and universities, government agencies (e.g. military), and commercial enterprises. It is important to be conscious of the fact that exploring the technological frontier is driven by cooperation already.

Radical innovations are potentially very costly, and if so, it is a prerogative to hedge the risks involved. If society wants to be involved in developing radical innovations, it is up to society to decide how it subsidizes R&D activities. Society can either subsidize this through investing in academic research facilities or other governmental institutions, or by awarding monopolies.

Reality provides us with an understanding that we are subsidizing both. And we invest in universities and military, and we award monopolies. But as a shareholder in society, I never received my fair share in the pay-offs of these investments. Contrary, I have to pay an extra premium. It all goes solely to businesses holding the patents.

In case incremental innovations are considered, investment risks are already negligible to the extent it is part of the ongoing competitive race. The only effect of changing the framework beholds a slight enhancement in competitive market conditions. Razor-blade manufacturers Gilette and Wilkinson are nice examples in this respect. They are involved in many legal disputes on their product attributes.

An extra razor-blade is such an incremental innovation, and are patented product attributes. My proposal enables every willing razor-blade manufacturer to use two, three, four, five, or how many razorblades they want to use. It would be ridiculous if we have laws stating that this is the exclusive right of specific parties to use either three, or four, or five blades. But, in effect, the generic wording of our patent-framework  implies this to be true nonetheless and lead Wilkinson and Gilette to visit the courts frequently.

Protecting investments

For legal frameworks to decide certain investments worthy of protection is a form of pure discrimination. There is no way around this. But if there exists a need to protect R&D investments in order to stimulate innovativeness, then it automatically becomes a question how these investments are protected.

It must be clear it cannot be a policy objective to decide whether or not investments are economically legitimate. There is only one ‘objective’ measure to conclude an investment was justified. This measure is commonly referred to as the free market.

Once investments are protected through eliminating competition, there is no objective measurement left. Exclusivity means that no-one else is allowed to compete. It makes the framework discriminatory. It is an absurdity of (economic) law. I would even go as far as to state this is not in line with constitutions. In almost every democracy, the first couple of articles determine discrimination (by government) to be prohibited by law. And yet, this is an example of a law that really is discriminating.

Arguments made

(16) It makes it impossible to recover (sunk) costs. This is a statement that is unlikely to be the case. At most, this adjustment causes greater exposure to investment-risks and cause lower potential profits. But it is very likely that businesses remain profitable since they hedge these risks. They only become less profitable than they would like.

Incentives and motives to invest still remain part of business environments. Beside, the necessity to invest in R&D activities to overcome exclusive concepts for products or production processes is eliminated. Those investments in really new innovations will be organized in a different fashion in order to cope with the investment risk of recovering these costs.

(17) It takes away leverage from small companies and unfairly advantages well capitalized firms. The argument is that when small businesses do not have a patent, a source of market power, they will no longer be able to compete with larger or well capitalized businesses. It is argued that a patent is a precondition to be able to compete with (larger) businesses, otherwise larger or well capitalized firms will have greater advantages.

The problem I have with this argument is that it only applies to the current framework, not to the proposed one. The current framework favors large firms to become larger. In other words, small businesses already have a weaker ‘leverage position’ as market participant.

What many people do not seem to get is how patents are distributed within business populations. Patents are predominantly held by large corporations, not by small businesses. Using the argument that patents provide small business a source of market power is rarely relevant indeed. If protecting small businesses is a policy objective at all, then patents must be considered a form of protecting large businesses.

Beside, if a patent of a small business is relevant, it is more important as a source of market value to sell a business, than it is to make use of the patent. Nowadays, a small company holding a patent is commonly acquired by well capitalized businesses, which has much to do with how and why new (innovative) businesses are financed. But even when a patent becomes relevant as a source of market power for a small emerging business, there is the risk of a new monopolist coming into existence.

The current patent-framework forces potential entrepreneurs to invest (substantially) before they can produce a product. When patents are not about exclusivity, the argument becomes no longer valid. Businesses can be started at much lower costs since they can take advantage of all technologies already available. Large corporations can no longer prevent the start-up of competitive businesses.

18) Adjustment framework disfavors emergence of new monopolists. High investment costs, or sunk costs are a reason for businesses not to enter a specific market. Pan-European Airbus was initiated with substantial EU-funds (subsidies) to increase competition in the aviation industry. There was economically nothing legitimate about this subsidy, except the argument that Boeing would otherwise have become a monopolist with too much market power.

This proposal results in lower sunk costs since it makes all investments part of the competitive race. It stimulates a greater dispersal of total investments in one industry over multiple businesses.

The need for large economic unions, such as the EU, or NAFTA, or ASEAN, to subsidize large industries in order not to become depending on a monopolist from another economic union, is at least lowered, and at most completely eliminated. Subsidizing industries is a race to the bottom. If one region is subsidizing an industry, the other has to subsidize too. This proposal eliminates this necessity.

Only by stimulating diversity in business populations it is possible to prevent new monopolists. This proposal favors all businesses, whether these are poorly capitalized, well capitalized, big or small. (19) Proposed framework increases the range of economic opportunities, favoring any business. Both the number of businesses as well as the variety within this number of businesses are stimulated, simply by enabling this. It makes economic markets and the whole of economic industries far more efficient and effective. That is what competitive markets achieve. The proposed framework is not discriminatory.

#6 – Objective of Legal Frameworks

What should legal frameworks accomplish? What should policies target? As an advocate of free market capitalism it is my prerogative to demand legal and economic frameworks that aim for free markets to emerge.

(20) Perhaps this framework is not perfect (HIV/AIDS medicines), but it is working just fine. This statement is one I not only consider dead-wrong, but ultimately foolish. If society does not eliminate favoring special interests by government, then that society is burdened with a government that serves special interests, rather than society itself. Governments and legal frameworks are institutionalized to serve only one interest: society. Unless I was brought up in an illusionary environment of freedom and democracy.

Moreover, the argument expresses a condemnation of human lives. If the example of HIV/AIDS medicine did not make you feel uncomfortable, well, do not expect any empathy when you are deadly sick. Imagine you are deadly sick and are incapable of accessing medicines. Ask yourself a simple question: are medicines more valuable than the lives of those who can be saved?

(21) Proposed framework increases economic efficiency and stimulates efficacy. It includes people, rather than excluding them. And as I state, at times basic human rights are violated.

Considering all the arguments made, I think it is a very fair and a legitimate conclusion that the current framework does not aim for free markets to emerge. Contrary, the current patent-framework is one of the most important contributing causes for oligopolistic markets and new monopolies to emerge. It causes such markets to persist and it prevents us to pick the fruits of competitive markets. It restraints our wealth and our well-being.

Conclusion and …selling a message

If it is true that our modern societies have arrived at the point where we no longer care for each other, where ever we might live, that we honor corporate profits more than we honor life itself, then we might as well conclude our economies are not truly capitalist, and this ultimately might lead us to conclude, it is our society that is not as free as we like to think.

Capitalism is about providing people with opportunities as is society. And it is certainly not about limiting these. Capitalism is about improving our lives as is our society. And it is certainly not about limiting prosperity. Within capitalist markets it is about competition, as it is within our society. It is certainly not about eliminating it. Competition is a crucial element that drives us to improve things. We’d better make use of this key feature, to use it as a means to improve our living conditions, and embrace it as a way to share our common interests.

Patents are discriminatory, and favor – yet undefined, but very distinctively nonetheless – special interests. It is about time to address the patent framework and any other framework alike. To address this issue for one reason only, it is our common humanity that is at stake.

There are three manners in which an idea, a product, or anything else can be sold convincingly. It is a marketing thing. Marketeers attempt to sell anything by invoking emotions. Though it is an arbitrary distinction in marketing strategy, emotions invoked are considered to be either fear, or hope. It almost always works.  People will buy anything as long as they think it serves them. It does not matter whether they understand how or why, as long as they think it serves them.

A slogan like, “If you do not buy this product, you will fail!”, is an example of the fear-strategy. “If you buy my product, you will succeed!”, would be the hope equivalent. And of course, a third manner is to use both these strategies: “Good persons go to heaven. Bad persons go to hell”…

If we were to change the patent-framework as I propose, it can only decrease societal progress as my discussion partner argued. In a way, it was argued that we must fear my proposal since it causes us more harm than good. The bottom-line of these arguments is: why should one invest in developing an innovation while other parties can just take a free ride? It is likelier causing decreasing research and development programs, than increasing them, and as a consequence, it will limit the pace of societal progress.

In other words, “if we implement this proposal, we must fear our well-being and societal progress”. Well, if we must fear competition, then perhaps it is about time to consider a new experiment, eliminating competition. Communism was such an expiriment and proved to be horror.

A reminder on communism: it eliminated competition, it eliminated free initiative, it eliminated free choice, it eliminated free speech. Eventually, communism became dictatorship, eliminating freedom. This is what we really should fear. A fear of (too much) competition is an invitation to trade freedom for protection. Protection of freedom always has a price-tag attached to it, it costs you your freedom.

If we were to change the patent-framework, it will increase societal progress. It creates more diversity within business populations of different industries, because it enables business opportunities to become possible. This proposal aims for free markets to emerge. And if there is one emotion I am attempting to invoke, it is hope.

The bottom-line of my arguments is that the proposed framework increases the number innovative results from research and development programs. It allows a higher pace of societal progress because it does not limit the use of innovations, rather it celebrates innovations by enabling and stimulating its widespread use.

I think it is blatantly immoral to back down, and look the other way. It is a societal duty to produce policies that aim at including all people, instead of inducing conditions that exclude people. It is an issue worth addressing. Decide for yourself what is more important. Settle quietly and accept this framework or call your representative and demand a major policy revision.

Consulted literature:

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Cefis, A. & O. Marsili (2005), “A matter of life and death: innovation and firm survival”, in: Industrial and Corporate Change, Vol.14, No. 6, pp. 1167-1192.

Cohen, W.M. & D.A. Levinthal (1990), “Absorptive Capacity: A New Perspective on Learning and Innovation”, in: AdministrativeScientific Quarterly, Vol. 35, No.1, pp. 128-152.

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Henderson, R. & I. Cockburn (1994), “Measuring Competence? Exploring Firm Effects in Pharmaceutical Research”, in:Strategic Management Journal, Vol. 15, pp. 63-84.

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McKelvey, M. (1998), “Evolutionary innovations: learning, entrepreneurship and the dynamics of the firm”, in: Journal of Evolutionary Economics, 8, pp. 157-175.

Pindyck, R.S. & D.L. Rubinfield (1998), “Microeconomics – International Edition”, fourth edition. Prentise Hall International, NewJersey.

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Saxenian, A. (2000), “Regional networks and innovation in Silicon Valley and Route 128”, in: Z.J. Acs (ed.), Regional innovation, knowledge and global change, Chapter 8, London/New York: Pinter, pp. 123-138.

Schumpeter, J. (1927), “The explanation of the Business Cycle”, in: Economica, No. 21, pp. 286-311.

Schumpeter, J. (1928), “The Instability of Capatalism”, in: The Economic Journal, Vol. 38, No. 151, pp. 361-386.

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Teece, D.J, G. Pisano & A. Shuen (1997), “Dynamic Capabilities and Strategic Management”, in: Strategic Management Journal, Vol. 18:7, pp. 509-533.

Thornhill, S. & R. Amit (2003), “Learning about Failure: Bankruptcy, Firm Age, and the Resource-Based”, in: Organization Science, Vol. 14, No. 5, pp. 497-509.

Wkipedia (especially discussion pages)

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