Against Intellectual Monopoly

view of the investment banking industry can be found in Lewis (1989). The
business-practices patent dates to the 1998 Court of Appeals for the Federal Circuit
decision in State Street Bank v. Signature Financial. In one of the most dramatic
examples of judicial legislation, the court held that there is no prohibition in U.S.
law on patents for business methods as long as they are new, useful, and nonobvious.
This is mentioned in Ladas and Parry (2003), who also provide a useful summary
of key developments in U.S. patent law. The State Street case is also discussed at
http://www.gigalaw.com (accessed February 23, 2008).
    18. Tufano (2003); the quote is from page 7 of the original working paper available
on line at the author's site, http://www.people.hbs.edu/ptufano/fininnov-tufano-
june2002.pdf (accessed February 23, 2008).
    19. The best empirical treatment of the fashion industry is Raustiala and Sprigman
(2006), from whom we stole the wonderful photographs of splurge versus steal.
The paper contains a great many similar examples and photographs. One of us just
came back from a skiing vacation during which he could not help but notice one
thing: the skiing industry innovates at a dramatic pace, essentially at the same pace
as the fashion industry, and it is, like the latter, de facto free of any kind of effective
patent protection. Do not get us wrong: each new gadget or shape or edge cut is
duly patented by the firm that gets to the patent office first. Still, every year, the
twenty or so companies that produce skis come up with new models and - they
are all practically identical! Just think of the various generations of carving skis: can
you tell which firm "invented" the idea of a carving ski? If the firm patented it - we
could not find evidence either way - it clearly did not matter, as everyone copied
it rather quickly. A patent (European Patent EP1208879) apparently sits out there,
describing something that may result into a pair of carved skis if you already know
what they are, but no one seems to care much. The same story applies to the dozen
or so firms competing in the ski-boots sector.
    A theoretical treatment of the fashion cycle can be found in Wolfgang Pesendorfer
(1995) whose model is perfectly consistent with competitive creation.
    20. Varnedoe (1990).
    21. A proposal for patenting sports moves is Kukkonen (1998). Although it may be that
sports leagues do not give monopolies for fear that exclusive rights will give one team too much of an advantage, they can also have optional or mandatory licensing
to allow the good ideas to spread.

    22. The Yale Survey is described in Levin et al. (1987) and Klevorick et al. (1995). The
Carnegie Survey is described in Cohen, Nelson, and Walsh (2000).
    23. Most of the information about patent pools is from Shapiro (2001).
    24. Nuvolari (2004a), p. 360.
    25. Derry and Williams (1960).
    26. North (1981).
    27. Gregory Clark (2007).
    28. See Nwokeaba (2002).
    29. Braguinsky, Gabdrakhmanov and Ohyama (2007)

     

FOUR
The Evil of Intellectual Monopoly
    We hope by now to have convinced at least a few among you that there
has been, there is, and there would be plentiful innovation in the absence
of intellectual monopoly. We took this as our starting point because a
widespread disbelief in the ability of competitive markets to reward innovators inhibits thinking about a functioning free market economy without
intellectual monopoly.
    After establishing that substantial amounts of money can be made, has
been made, and is made by innovators in the complete absence of patents
and copyright, the next fundamental doubt is, Is that money enough? It is
quite a rhetorical question for the thousands of innovators who, absent legal
monopoly, have nevertheless innovated: the money they expected to make
must have been enough to motivate them. It is not necessarily such a rhetorical question, though, for potential innovators who chose not to innovate
and for all those innovators who took advantage of intellectual monopoly
in their activity. Because it is true that an innovator can generally earn more
with a monopoly than without, so the profits made under competition may
not be enough and some socially valuable innovations may not occur under
competition. This - in principle - leaves room for government intervention to correct this market failure. Awarding intellectual monopoly is one
possible form of intervention. Unfortunately, it is an