Patents, Progress, and Innovation: A Nobel Tale of Caution
This year’s Nobel Prize in economics went to Joel Mokyr, Philippe Aghion, and Peter Howitt for their research on how technology and innovation drive economic growth. Their work focuses on the underlying institutions that shape progress and attempts to provide greater insight into the “creative destruction” that characterizes activity in a market economy. The award carries particular relevance to the current debate on patent policy, warning that excessive patenting can actually impede innovation.
Like prizes, research subsidies, and grants, patents create an incentive to invent and a means of generating the investments required to develop new technologies. Consequently, policymakers often assume that patents are unambiguous drivers of innovation and growth. But the latest Nobel laureates offer important caveats to such assumptions. While acknowledging that patents serve a useful purpose, they also caution that an overly expansive patent regime can introduce barriers to innovation that slow progress and economic growth.
The prizewinners’ research attempts to understand how knowledge transforms into innovation, which in turn spurs economic progress. Mokyr finds this requires the free flow of ideas to be combined and applied in new, novel ways. He notes that the Industrial Revolution was driven not by strong patents, but by the free flow of ideas and the pursuit of knowledge—including the emergence of scientific societies, open publication, and a culture of knowledge. Indeed, many great thinkers and inventors of the time refused to patent their ideas.
The very nature of patents impedes this free flow of information. While they can entice inventors to invent, they can also create chokepoints on the diffusion of knowledge. This year’s laureates highlight how innovation depends on cumulative knowledge, with inventions building upon previous discoveries. Excessive patenting that blocks foundational knowledge can halt entire streams of follow-on inventions.
Congress and the USPTO: Moving in the Wrong Direction
U.S. policymakers have failed to heed these warnings. While the Supreme Court has consistently held that “laws of nature, natural phenomena, and abstract ideas” are not patentable, the Patent Eligibility Restoration Act introduced in Congress earlier this year would broaden the definition of patentability, creating the exact chokepoints that Mokyr, Aghion, and Howitt have cautioned against. When foundational knowledge is improperly monopolized, the reduced flow of ideas slows technological progress.
Congress is also considering the Promoting and Respecting Economically Vital American Innovation Leadership Act, which would make it more difficult and costly to contest questionable patents. This would facilitate the growth of patent thickets—dense webs of secondary patents surrounding an original patent to keep rivals out of the market. In the pharmaceutical sector, this tactic limits the entry of low-cost generic alternatives. Yet many of these secondary patents are not necessarily novel or non-obvious, making them ripe to challenge.
Newly appointed U.S. Patent and Trademark Office (USPTO) Director John Squires is moving patent policy in the same troubling direction through administrative action. He has expanded the use of discretionary denials for patent challenges, thereby consolidating authority over the institution of patent challenges in the director’s office. Using this new authority, Squires recently denied the institution of 13 inter partes review proceedings without explanation. At the same time, he is expanding patent eligibility by encouraging patent examiners to prioritize technological improvements rather than elevating concerns over the patentability of abstract ideas.
From Innovation to Rent-Seeking
Excessive patenting shifts the framework from innovation to monetization. Patents become tools for extracting monopoly rents through litigation rather than spurring innovation. Resources flow away from innovation toward litigation and legal maneuvering to capture and extend monopoly gains. As Howitt warns:
[F]ear of patent litigation can also slow down the diffusion of technology and impede the technology transfer that modern Schumpeterian theory highlights as critical for long-run prosperity. Thus the more broadly we extend patent rights to include such things as software and genetic combination, the more we inhibit the flow of ideas by giving a strategic advantage to patent-holders with deep pockets.
The rise of non-practicing entities (NPEs) illustrates this problem. Often called “patent trolls,” NPEs do not innovate or produce anything. Instead, they acquire large patent portfolios monetized through litigation or by collecting royalties and fees from those who actually do innovate. Deploying patents in this way can harm technological advancement. This is a significant departure from the objectives of the Constitution’s Progress Clause, which granted Congress the authority to enact laws to “promote the Progress of Science and useful Arts.”
Protecting Incumbents and Blocking Competition
Aghion and Howitt’s research focuses specifically on the role of creative destruction in long-run economic growth. With dominant firms continually under threat from rivals and new startups, the constant competitive pressure creates an intense drive for innovation. This drive to stay one step ahead of their rivals—escaping competition—is a key source of innovation.
But overpatenting protects firms from competitive pressures, thereby dulling the incentive to innovate. Aghion raises concerns about yesterday’s innovators using their rents to deter threats from future innovators and block new entry. This is common in the pharmaceutical sector, where brand-name manufacturers build dense webs of patents that make entry by lower-cost generic manufacturers difficult. For example, Humira—a popular drug for rheumatoid arthritis—had 136 patents, many providing no novel innovation.
Elsewhere, the threat of litigation by NPEs deters competition even when the patents are weak. Overall innovation suffers when legal risks over patents affect market entry, reducing social welfare and economic growth. The system is optimized for litigation rather than invention, favoring large firms with the resources to respond to legal challenges over smaller, capital-constrained independent inventors.
Conclusion
The Nobel committee acknowledged the importance of understanding what enables innovation and transforms it into economic progress. These new economic laureates do not argue that patents cannot play a role; when applied correctly, they do provide the incentives to innovate. But they also note other drivers of innovation, such as the first-mover advantage and innovating to beat the competition, as well as prizes and grants for inventive activities. Patents can be an effective policy tool, but poorly executed and overly restrictive patent policies can deter innovation.
The USPTO has granted more than 12 million patents, with over 365,000 issued just last year. Yet there is little correlation between the number of patents and economic growth or productivity measures. One study notes that although the number of patents granted increased by 50 percent in the 2000s compared to the 1950s, the productivity growth rate in the 2000s was only half that in the 1950s. The author points to the creativity embedded in patents as one explanation for what he calls the “innovation puzzle,” concluding, “[T]he excess increase in patents is entirely driven by an increase in non-creative or derivative patents.” Such patents may not contribute to economic progress; however, they do fuel litigation and impede innovation by others.
Congress and the USPTO are moving in exactly the wrong direction with policies that may exacerbate the anticompetitive aspects of patents. This year’s Nobel laureates have emphasized the importance of maintaining policy and institutional frameworks that foster creative destruction and innovation. Patent policy should reflect these underlying principles and focus on ensuring patent quality while eliminating their strategic use for litigation and the extension of monopoly rents.