
Here’s why economists hate software patents - Libertatea
http://www.washingtonpost.com/blogs/the-switch/wp/2013/07/31/heres-why-economists-hate-software-patents/?tid=rssfeed
======
rayiner
The economic justification for patents is to protect from the free rider
problem. If A invests 10 million in a technology, and B just copies it, B can
undercut A on the market because it doesn't have to recoup R&D costs in the
price. That leads to companies underinvesting in expensive R&D, because the
winning play is to copy, not invent.

For most software patents, the capital cost is almost nothing. Even if it took
a programmer a whole year to invent something, that's like 100k--no money at
all in the larger sense. So it makes no sense to protect a capital investment
that's negligible.

That said, the article really fails to explain why lawyers don't want to have
a categorical exclusion for software patents. Usually, you want a legs
principle to get to the root of why something is bad, not address bad
situations ad hoc. Why are software patents bad? Sequential innovation, as
mentioned in the article? If so, that should be the basis for the exclusion,
not whether something is software or not.

~~~
pravda
Well, I think we understand what you mean, but R&D costs are sunk costs. They
have no relevence when setting prices.

If you have a patent on, for example, the chainsaw, and are the sole
manufacture of chainsaws, you can set the price of a chainsaw based solely on
how much your tree-cutting-down gizmo is worth to the consumer.

~~~
rayiner
You're talking about long-run equilibrium which isn't totally relevant here
([https://en.wikipedia.org/wiki/Market_power](https://en.wikipedia.org/wiki/Market_power)).
In a perfectly competitive equilibrium market, you're right, producers are
price takers. But we're not talking about wheat farming. When we're talking
about the introduction of new products, etc, we're necessarily talking about
markets that aren't in their long-term equilibrium. Such markets are where all
the money is made. E.g. today, the CD drive market is probably in its long-run
equilibrium and highly competitive, and there is no profit to be made
producing CD drives. But it was a highly lucrative product for Sony when the
technology was first introduced. In these contexts, producers do have a
certain amount of pricing power, and can extract positive profits as a result.
Moreover, even in perfectly competitive markets, where costs are irrelevant to
prices, costs are relevant to companies' decisions about whether to engage in
R&D. If the market dynamics are such that prices approach marginal cost, there
is very little incentive to engage in R&D, because it won't be profitable.

As a concrete example, say you're ARM and contemplating investing $1 billion
to put a new quad-core 3 GHz 1W CPU on the market. Because this a new product,
you have a certain amount of pricing power to begin with. That pricing power
allows you to extract positive economic profits, at least until your design is
copied and the market becomes highly competitive. For the whole exercise to be
worth while, you have to recoup that $1 billion in R&D before the market
becomes competitive and prices approach marginal costs of production. If your
Chinese competitor can copy your design for $100 million in 6 months, they
have a huge advantage. At that point both companies will together likely still
have a lot of pricing power, but because your competitor had much lower R&D
costs to get the same product, he can undercut you o price and still recoup
his lower R&D expense. In that sort of market, the profitable strategy is to
copy, not to do original R&D.

~~~
spacelizard
The problem with that example (and that whole line of thinking) is that the $1
billion they put into research was a gamble in the first place and didn't
actually give them any pricing power because it has nothing to do with the
demand for that product. Why should we care? Knowing the current market it's
actually way more likely that that the product flops completely and the $1
billion goes completely to waste. But now because of patents they get to stay
in business to repeat this mistake again because they can just extort
licensing fees from other companies who want to actually improve this idea and
make it marketable. It just doesn't make any sense from any perspective.
Demand should be what drives R&D, not profit. When profit drives research
that's all you'll get: companies with no products hoarding research (i.e.
patents) and just sitting around suing people.

~~~
rayiner
R&D does give companies pricing power. If you come up with a 3 GHz 1W chip in
a market of 2 GHz 3W chips, suddenly your product is non-fungible with all the
other competitors, and as a result you can price the product above its
marginal cost. Whether it's worthwhile to spend $1 billion doing that depends
on how long you can last before all your competitors come up with 3 GHz 1W
chips. Because once that happens, competitive pressures will force prices
downwards to the marginal costs of production. If that time isn't long enough
for you to recoup that R&D, then it's a losing play to be the one that puts in
that work. The winning play is to be the company that copies that technology
and maybe tweaks it the last 1%.

As a practical matter, profit has to drive R&D, because there is no money for
R&D without profits. And in perfectly competitive markets, there are no
profits and no R&D. The only way to make real money is to produce products
that are non-fungible, and differentiable. You can do that in only a few ways:
R&D, network effects, marketing, or branding. If you look at the profitable
companies in the tech industry, their profits come from one or the other. If
you look at the companies that produce fungible products for highly
competitive markets (Acer, Lenovo, etc), you see that they their profits are
marginal and so is their level of innovation.

------
fiatmoney
The bargain with a patent is supposed to be that

a) you get to build/use/sell an invention exclusively for a certain length of
time, in exchange for b) publicizing how you did it.

A good number of software patents fail the second part of that test, to say
nothing of originality etc., because they only declare the behavior and don't
provide a reusable implementation - a lot of the time because they're derived
from "wouldn't it be cool if..." spitballing sessions (especially in large
companies).

------
James_Duval
The Robert Sachs who commented wouldn't be the "Robert R Sachs" of Fenwick &
West LLP whose job is establishing lists of patents for large companies, I
suppose?

Read his comment for some entertainingly wrong-headed views on how software
(and, indeed, thought itself) works.

------
lettergram
My argument on patent reform, is why not only allow software patents for a
year (perhaps two). Being the first on the market gives you 90% of the
advantage and it keeps you innovating to push further faster, while at the
same time allowing competition to spring up and keeping lawsuits low.

------
guard-of-terra
They could as well start hating software patents around ten years ago, when we
all did.

Ten years and we didn't make any progress, how miserable is that?

------
lowboy
Economists hate her! Use this one weird old tip to patent software.

------
FedRegister
Are these the same economists that had NO IDEA that the crash in 2006 would
happen? If so I think I've had quite enough of their opinions.

~~~
dredmorbius
This is a largely emotional reaction against the discipline but FedRegister's
got a pretty good point: economists and economics (as a whole, there are
exceptions) have done rather poorly in either predicting the future or
providing solid rationales for what is and why it should be.

This is a fact that's widely recognized, even among economists.

Source: I've got an undergraduate degree in the topic, have been continuing to
study it over the subsequent decades, and have been specifically researching
in depth the foundations of the discipline in the past few months.

One rather striking failure of economics has been its lack of interest in
long-term history. Which is peculiar if you've read Adam Smith as he actually
goes into depth on the matter. It's the #2 economist, David Ricardo, who drops
that view (though there continue to be economic historians), a fact which was
criticized quite strongly by Arnold Toynbee (the economic historian, not his
universal historian nephew Arnold J. Toynbee), whose _Lectures on the
Industrial Revolution_ begin with the observation:

 _It has been a weakness of the science, as pursued in England, that it has
been too much dissociated from History. Adam Smith and Malthus, indeed, had
historical minds; but the form of modern text-books is due to Ricardo, whose
mind was entirely unhistorical._
[http://archive.org/stream/industrialrevol00toyngoog#page/n16...](http://archive.org/stream/industrialrevol00toyngoog#page/n16/mode/2up)
(page 1, 18 of the PDF)

It goes further than this. Nassau Senior, a strong early supporter of Ricardo
writes: "Political economy is not greedy of facts; it is independent of
facts." Serious WTF moment there.

The Austrian School (from which Classical Liberalism, a/k/a Libertarianism
takes its lead) is even worse. Speaking of praexology, the interpretive method
on which it's based:

"Its statements and propositions are not derived from experience. They are,
like those of logic and mathematics, a priori. They are not subject to
verification or falsification on the ground of experience and facts." \--
Ludwig von Mises [http://www.goodreads.com/quotes/846342-praxeology-is-a-
theor...](http://www.goodreads.com/quotes/846342-praxeology-is-a-theoretical-
and-systematic-not-a-historical-science)

Suddenly the whole "reality-based" vs. "faith-based" divide becomes a tad bit
easier to understand.

There's a great deal else out there, and no, not all of economics is complete
tosh, but a great deal of it really should be tossed out.

~~~
lukifer
Many fields can succumb to a compartmentalizing of ideas and getting lost in
leaky abstractions, and economics is possibly one of the most egregious. To
very loosely paraphrase Alan Kay, anyone serious about economics will also
study psychology, anthropology, sociology, and evolutionary biology. These
fields are deeply interconnected in the same sense that calculus, physics and
chemistry work together to create an understanding of complex physical
systems. (For a good start, see Dan Ariely's behavioral economics.)

~~~
dredmorbius
What's particularly ... peculiar ... about economics is the degree to which
specific elements of it have been so vigorously adopted, promulgated, and
defended by certain sectors.

I'm still digging into the history behind Ricardo, but briefly:

\- He was an ideological opponent (though apparently close personal friend) of
Robert Malthus. Malthus strongly criticized Ricardo's theories, and repeatedly
questioned their inclusion in the Encyclopedia Britannica, suggesting they
wouldn't stand the test of time.

\- Malthus himself became strongly criticized by Ricardo's supporters. Much of
that _present_ criticism focuses on Malthus's writings on population, though
these largely focused on the poor, and expressed a viewpoint not much
different from Ricardo's. But by focusing the attention here, Malthus's own
criticism of Ricardo is distinctly underrepresented. Compare this with Helen
Keller, whose notability to most people is her role as an advocate for the
rights of the disabled. Her actual attentions during her life were in support
of socialism. For some reason, that message doesn't make it into elementary
school texts....

\- Ricardo's principle work was his theory of rent, which focused attention on
landowners and laborers, suggesting that capitalists would be left wanting in
allocations of wealth.

\- Ricardo's own wealth came from stock speculation and banking. He later
bought a parliamentary seat, according to Toynbee (I'm not sure how unusual a
practice this was at the time), and used his MP position to advocate for his
political economy (as the study was called at the time) views.

\- Ricardo's papers and letters were collected by John Ramsey McCulloch, and
subsequently bought by Lord Overton, another banker. They're now hosted by a
number of largely libertarian-leaning organizations including the Ludwig von
Mises Institute and Online Library of Liberty.

Again: my working hypothesis is that much of economics is more a too for
justifying allocation of resources to benefit a specific class than a
dispassionate study of a system. Not a unique view by any means:

[https://en.wikipedia.org/wiki/Rajani_Kannepalli_Kanth](https://en.wikipedia.org/wiki/Rajani_Kannepalli_Kanth)

Rajani Kanth's major philosophical theories include:

a) that Ricardian Economics was merely policy advocacy in theoretical
guise,[2][16][17][18][19][20]

b) that Economics is the crown jewel of the hegemonic ideology of
Modernism,[2]

c) that European Modernism, whose derivates are capitalism and socialism, is
the real grey eminence that has crafted the alienated misery of our epoch ...

John Kenneth Galbraith has some similarly damning comments:

 _Leading active member 's of today's economics profession...have formed
themselves into a kind of Politburo for correct economic thinking. As a
general rule --- as one might general expect from a gentleman's club --- this
has placed them on the wrong side of every important policy issue, and not
just recently but for decades. They predict disaster when none occurs. They
deny the possibility of events that then happen.... They oppose the most
basic, decent and sensible reforms, while offering placebos instead. They are
always surprised when something untoward (like a recession) actually occurs.
And when finally they sense that some position cannot be sustained, they do
not reexamine their ideas. They do not consider the possibility of a flaw in
logic or theory. Rather, they simply change the subject. N one loses face, in
this club, for having been wrong. No one is dis-invited from presenting papers
at later annual meetings. And still less is anyone from the outside invited
in._

(Quoted in Robert Heinberg's _The End of Growth_ ).

~~~
lukifer
Interesting read, thanks. I'll definitely look into Kanth further; the notion
that gender struggle predates class struggle is intriguing, and seems almost
obvious in hindsight.

I agree that much of conventional economics functions largely as apologia and
"retroactive continuity" for existing power structures and legacy wealth.
While there are obviously spectra of disagreement within the field, as a whole
it does seem largely oriented towards received wisdom in its academic culture,
but that's from a distinctly outsider perspective.

What's your opinion, if any, of David Graeber's ideas in "Debt: The First 5000
Years"?

~~~
dredmorbius
I've cracked the first 50 pages or so of his book. The writing is dense and
Graeber covers a lot of ground.

That said: his is some of the most original writing on the topic of money I've
seen, period, it's not obviously wrong, to the extent I've read it, it
addresses a great many misconceptions baked into economics since the time of
Smith. Specifically: correcting Smith's descriptions of pre-money economies as
being barter based, which Graeber replaces with gift-based (though that's
something which works only in communities up to a certain size, most communal
communities peaking around 300 members).

Money in general is something that fascinates me (in an abstract, what-is-it
and how-does-it-influence-the-economy sense). It seems intrinsically tied to
both the fossil-fuel lead growth of the past 200 years. As some have pointed
out, the US transition to a central bank, fractional reserve, fiat currency
pretty much tracked the milestones of industrialization: railroads (1830s),
electricity and industrialization with the start of the petroleum boom (1930),
oil imports and Bretton Woods (1950s), and the transition past peak oil with
the birth of the petrodollar (1972). Dates somewhat approximate. There's the
point that's raised by many (Richard Heinberg and Chris Martenson in
particular) that fractional reserve lending and monetary supply growth mandate
economic growth, which I haven't fully subscribed to, but that would suggest
one primary source of opposition to sustainable, zero-growth economic
paradigms.

~~~
dragonwriter
> Specifically: correcting Smith's descriptions of pre-money economies as
> being barter based, which Graeber replaces with gift-based

That's not really a correction; there are pre-currency societies with both
barter- and gift-based (and there's not really a clear delineation between the
three, there's overlap between barter- and gift-based structures in pre-
currency societies, and overlap of all three once currency is in the mix.)

> There's the point that's raised by many (Richard Heinberg and Chris
> Martenson in particular) that fractional reserve lending and monetary supply
> growth mandate economic growth, which I haven't fully subscribed to, but
> that would suggest one primary source of opposition to sustainable, zero-
> growth economic paradigms.

The human desire for better things demands economic growth; zero economic
growth _literally_ means things never get better (currency-value-based
measures of economic growth are _proxies_ for changes in experienced utility;
zero economic growth means _no_ increases in experienced utility. That's not
really a desirable goal.)

~~~
dredmorbius
> there are pre-currency societies with both barter- and gift-based

Smith doesn't allow for the concept of a gift-based economy. Or for the
possibility of an explicitly accounts-based economy, also supported by the
anthropological record.

> zero economic growth _literally_ means things never get better

I've argued both sides of that statement myself. I think I'd argue it on an
evolutionary basis: the level of supportable complexity is static, but the
_focus_ of that complexity, where complexity is used to provide solutions to
problems, isn't fixed. As the environment itself changes, or even interests
within that environment, changes can occur within the economy. It's _bounded_
but not _static_.

The _material standard of living_ cannot increase overall, but its application
and allocation can be shifted.

And whether or not the goal is desirable really has zero impact on how real
the situation is. That's a classic wishful thinking response -- or if you
prefer, _argumentum ad consequentiam_ , appeal to consequences, or Diax's
Rake. The Universe doesn't owe you your desired lifestyle.

