Against Intellectual Monopoly

competition, it induces further waves of innovation. Current legislation seems
designed to prevent this from happening, thereby greatly reducing the social
value of innovative activity.
Financial Markets
    When you hear the phrase "judge-made law," you probably think of controversial areas, such as abortion and privacy. But the greatest changes in
the legal system made by judges, without legislative review or approval,
have occurred in the area of patent law. The extension of patent protection
to computer software is one example; another is the patenting of financial securities. Prior to 1998, investment bankers and other firms selling
financial securities operated without the "benefit" of "intellectual property." The rapid pace of innovation in financial securities prior to 1998 is
well documented, for example by Tufano.17 Tufano estimates that roughly
20 percent of new security issues involve an innovative structure. He reports developing a list of some 1,836 new securities over a twenty-year period and
remarks:

    [This] severely underestimate[s] the amount of financial innovation as it includes
only corporate securities. It excludes the tremendous innovation in exchange traded
derivatives, over-the-counter derivative stocks (such as the credit derivatives, equity
swaps, weather derivatives, and exotic over-the-counter options), new insurance
contracts (such as alternative risk transfer contracts or contingent equity contracts),
and new investment management products (such as folioFN or exchange traded
funds.) is
    Three features of this market particularly deserve note. The first is that
innovating in the financial securities industry is very costly, as those that
create new securities are highly paid individuals with Ph.D.'s in economics,
mathematics, and theoretical physics. The second is that competitors quickly
imitate financial innovations. The third is that there is a pronounced advantage of being first, with the innovator retaining a market share between 50
percent and 60 percent even in the long run. Accounts in the popular press
of investment banking in the 1980s, such as Lewis's vivid portrayal, also
document that innovation was widespread, despite the complete lack of
intellectual monopoly. We are all well aware that, for good or for bad, but
mostly for the first, the investment banking industry grew tremendously
between the late 1970s and the late 1990s, bringing economic growth to the
whole of the nation and increased welfare to millions of consumers. And
all of this happened in the complete absence of any form of intellectual
monopoly.
    This story, sadly, is now over. On July 23, 1998, in State Street Bank
er Trust Co. v. Signature Financial Group, Inc., the U.S. Court of Appeals
for the Federal Circuit held patentable Signature's data-processing system
for hub-and-spoke financial services configuration. Prior to this ruling,
methods of doing business and mathematical algorithms could not be
patented. After this ruling, at least insofar as they are embodied in computer code, business methods and algorithms are patentable; in particular,
it is now possible to patent financial securities: there are now tens of thousands of patented "financial inventions." By this remarkable act of judicial
activism, the courts extended government-granted monopolies to thriving markets, such as those for financial securities, where innovation and
competition had gone hand in hand for decades. Should this trend not be
reversed, we expect that within a decade or so, economists studying the
U.S. financial securities industry will be pondering a productivity slowdown and wondering what on earth may have caused it. At the current time, about eight years after patents were introduced in the financial and
banking sectors, there are no signs that this reallocation of property rights
has spurred any wave of new innovations and unprecedented economic
growth.

Design
    For historical and practical reasons, neither fashion design nor design at
large (architecture, furniture, lighting, and so forth) are - or better said,
were, until the other day - effectively protected by patents and copyrights.
To be sure, design patents exist, they are carefully and scrupulously described
in voluminous manuals, and hundreds of design patent applications are filed
with the U.S. Patent and Trademark Office every month. However, it is quite
clear from everyday experience that, in design, imitation is as