[Patents] PATNEWS: A critique of Bessen/Maskin's innovation and patents paper

[PILCH Hartmut phm@a2e.de]

> !20010131  A critique of Bessen/Maskin's innovation and patents paper
>
>     There is a debate going on over in Europe on the patenting of software.
> Some of those fighting software patents in Europe (and wanting to keep the
> current minimalist prohibition, 52.2.c in the law) are trying to raise the
> issue of the inherent evilness and utter reprehensibility of software
> patents.

No, they are merely asking the question whether software patents in
general benefit society enough to justify their existence.

It is bad journalistic style for a News organ to try to assign ridiculous
positions to your arguing opponent.

> One weapon they use is to cite a paper published a year ago by
> two economists in the Boston area, Eric Maskin of MIT's Economics Dept.,
> and James Bessen, a consultant in the Boston area.  I feel that it is wrong
> to use this paper in a policy argument because a) the paper's models are
> unrealistic, and b) their use of correlating data is questionable. What
> follows are comments on these two concerns.

It is wrong to argue for software patents without proving their
benefit.
This paper provides quite detailed models and data to suggest that there
is no benefit but rather harm.
That is enough to justify a policy decision in favor of traditional
European patent law doctrine.
It would even be enough to justify a US decision to roll back the
policy decisions of the CAFC.
The patent system is not an end in itself.

You have been told that many times.

>     They propose a simple economic model to argue that in sequential
> innovation industries like software, semiconductors and computers, that
> patent protection may reduce overall innovation and social welfare.  The
> paper is titled "Sequential Innovation, Patents and Imitation", January
> 2000 (it's on the Web).  Here is the abstract:

>         How could such industries as software, semiconductors, and
>         computers have been so innovative despite historically weak
>         patent protection?  We argue that if innovation is both
>         sequential and complementary - as it certainly has been in
>         those industries - competition can increase firms' future
>         profits thus offsetting short-term dissipation of rents.
>         A simple model also shows that in such a dynamic industry,
>         patent protection may reduce overall innovation and social
>         welfare.  The natural experiment that occurred when patent
>         protection was extended to software in the 1980's provides
>         a test of this model.  Standard arguments would predict
>         that R&D intensity and productivity should have increased
>         among patenting firms.  Consistent with our model, however,
>         these increases did not occur.  Other evidence supporting
>         our model includes a distinctive pattern of cross-licensing
>         in these industries and a positive relationship between
>         rates of innovation and firm entry.
>
>
> The problem is that these models are too simplistic to represent the
> complicated dynamics of the software world, and the economic data they
> use represents only part of the software industry.  To then use this
> paper to argue against software patents is intellectually dishonest.

It is not enough for you to point out that the Bessen & Maskin model is
simplistic.
Any economic model is simplistic.
You have yet to show why the Bessen & Maskin model is unrealistic and how
it should be corrected to better reflect reality.

Your approach of fault-finding with papers whose tendency you don't like
is intellectually dishonest.

> For example, consider the introduction to the static version of their
> model:
>
>         We consider an industry consisting of two (ex ante symmetric)
>         firms.  Each firm can undertake R&D to discover and develop
>         an innovation with expected (social) value V.  The cost of
>         R&D is C, and if a single firm incurs that cost, the
>         possibility of successful innovation is P.  We assume that
>         if a firm is not copied, it can capture the social value of
>         its innovation.  However, the other firm, unless prevented by
>         patent protection, can costlessly develop an imitation.  And
>         if it does so, the innovating firm obtains only a fraction S
>         (S < 1/2) of the value of V (to simplify matters, we assume
>         that the imitating firm captures this same faction s).
>
> and a dynamic version
>
>         Let us now enrich the model to accommodate a sequence of
>         potential innovations, each of which builds on its immediate
>         predecessor.  More specifically, we will suppose that, for a
>         firm to have a realistic chance of developing the innovation
>         of the next generation, it must have market experience with
>         that of the current generation.
>
> Anyone recognize the US software R&D community (companies, universities,
> government labs, individuals communicating over networks) in these models?
> Additionally, marketing plays a big role in driving R&D (not only for
> software, but pharmaceuticals as well).  Finally, while patent protection
> is a useful tool, I don't think it is a strategic tool that shapes R&D
> along the lines of these two models.   In short, they propose two models
> fun to explore mathematically, but that's it.

So you are saying that these models don't apply to reality, because the
impact of software patents is not big enough to really influence R&D ?

> Thus, as a message to the Europeans, one has to be really careful in
> applying conclusions from the analysis of such models to the real
> world for policy purposes.

So far, European policy makers have not taken any economic research into
account.  They have just based their pre-decisions on the patent lawyer
faith.  Now that some of them have started thinking in scientific terms,
using, as always, a simplistic model, you are suddenly in a hurry to tell
them to stop this kind of scientific thinking.

> What is of additional concern to me is one such application of their
> models to understand the US software patenting scene.  They create an
> either-or explanation for a situation which has many potential
> explanations. Arguing about software, they write:
>
>         A series of court decisions in the early 1980's had the effect
>         of extending patent protection to many software ideas.
>         Consequently the number of patents issued annually covering
>         software grew exponentially from the mid-80's to about 7,000
>         in 1995.  Within the software industry, this has sometimes
>         been described as a case of "fixing what ain't broke".
>         Advocates counter, arguing along the lines of the static
>         model, that increased patent protection should increase
>         software innovativeness.
>
>         If the static model is correct, then the extension of patent
>         protection should have produced a sharp increase in R&D
>         spending among those firms and industries applying for
>         patents.  This should have subsequently been followed by an
>         increase in productivity growth.  The changes should be
>         measurable and large after controlling for other, possibly
>         offsetting charges.
>
>         [.....]
>
>         To summarize, if the state model holds, relative R&D spending
>         should have increased sharply, followed by productivity.  If
>         the dynamic model applies, relative R&D spending and productivity
>         would not have increased and might exhibit a mild decrease.
>
> First, the court decisions favoring software patenting only partially
> explains the rise in software patent applications.

If you replace these decisions by another set of decisions (such as those
made in Europe in the 70s), there would be no software patent applications
at all.

> The authors ignore
> the parallel set of court decisions that weakened copyright protection
> for software, which drove many to the patenting side.  The investment
> climate also became very favorable to the software industry in the 1990s,
> which also partially drove the increase in software patent applications.

This again is part of Greg's myth that has been refuted in long arguments.
I think it was Ramon who quoted the interface copyright decisions and
explained why copyright on these things is dubious had had to be weakened.

Freedom of expression is a high good, and it has traditionally been
restricted by nothing but copyright.
So copyright, too, must be put to the test of whether this restriction is
justified by the promotion of progress in science and the useful arts.
In the case of interface copyright, it failed this test.
In most other cases, it works and is of great value for the software
industry.
Software patents in general fail the test.
They impose far-reaching restrictions on a high good while producing no
benefit to society.
You don't need Bessen & Maskin's sophisticated model to prove that.
And you don't need to ask whether it really proves it.
It is you, the other side, that has to make it plausible that there is at
least some overall benefit to software patents as they stand.
Since you don't even attempt to prove that, the case is clear.
The failure of software patent advocates, including Aharonian, IPI,
Koerber and all others, to even attempt to argue that software patents
promote progress of science and the useful arts, already proves that
they do not.  The rest is merely fault-picking and a show of bad faith.

> Next, they analyze these models in light of NSD and NBER R&D economic
> data. They conclude
>
>         In summary, the initial high level of innovation in software,
>         mixed industry support for patents, and an apparent gradual
>         slowdown of R&D intensity all suggest that the applicability
>         of the dynamic model.  This conclusion is also supported by
>         the distinctive pattern of cross-licensing in the semiconductor
>         and computer industries and by the more general positive
>         relationship between innovation and firm entry.  All of this
>         is difficult to reconcile with the traditional static model
>         of intellectual property.
>
> So using a simplistic two firm semi-dynamic model, and a subset of all
> of the economic data relating to these industries, they make some
> conclusions.  Interesting, but how relevant?  For example, consider
> the phrase in their abstract:
>
>         A simple model also shows that in such a dynamic industry,
>         patent protection may reduce overall innovation and social
>         welfare.
>
> They measure innovation and social welfare for the software industry
> using the NSF and NBER data from the 1974 to 1994 time period, and
> conclude "... in a dynamic world, firms may have plenty of incentive
> to innovate without patents and patents may constrict complementary
> innovation."  Constrict?
>
> Whoopee.  Given all of these simplifications and "may" qualifiers, it is
> dubious to bad logic for anyone to then argue that the Bessen/Maskin
> article is grounds to ban software patents because they are bad.
>
> In the real world, is there any evidence that the explosion in (bad)
> software patents has stifled innovation and social welfare?  I offer
> some data to show that you can't answer this question YES or NO.  The
> data I offer is the new number of papers in the INSPEC engineering
> abstracts database that have a keyword entry "SOFTWARE".  INSPEC has
> abstracts to most of the journals and conferences where new refereed
> papers are published, papers that come out of the many corporate,
> academic and government R&D environments where software plays a role.
>
>
>                     YEAR   NEW "SOFTWARE" PAPERS IN INSPEC
>                     1999                  19,480
>                     1998                  20,143
>                     1997                  20,187
>                     1996                  19,743
>                     1995                  17,181
>                     1994                  17,632
>                     1993                  14,450
>                     1992                  13,336
>                     1991                  13,088
>                     1989                  14,797
>                     1988                  17,159
>                     1987                  15,538
>                     1986                  13,295
>                     1985                  12,139
>                     1984                  13,615
>                     1983                  10,615
>                     1982                   6,799
>                     1981                   6,615
>                     1980                   4,943
>                     1979                   4,382
>                     1978                   3,960
>                     1977                   2,764
>                     1976                   2,370

> What we see is a gradually increasing amount of new materials published
> about software over a time period when the number of issued software
> patents went from a few hundred a year to a few tens of thousands a year.
> During the 1990s, each year saw about a 8% growth in the number of new
> software publications.

Evidently, according to this, growth slowed down in the 90s.
If software patents are promote progress, it should have accelerated.
Otherwise there is no need to pay the price of restriction on freedom of
expression.
Of course, statistics of INSPEC papers do not mean much in the first
place, so I am saying this only for the fun of the argument.

> Hard to argue then that innovation and the public's desire for publication
> of new ideas, has suffered at all.  Heck, as someone who has to keep
> track of all of these materials for prior art searching purposes, I wish
> software patents were stifling things so I would have less to track :-)
>
> Looking at all sorts of data, it is hard for me to argue anything but that
> software is just another technology with patenting problems no different
> than other technologies (though I do think the quality of software patents
> is lower).  While the Bessen/Maskin article is suggestive, it is too
> simplistic to use as a jsutification for any policy decision.
>
> Greg Aharonian
>
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