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The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

The New Renaissance HatJeffrey A. Tucker

Who has the right to make a “hoverboard”?

Shane Chen of Portland, Oregon, owns the patent to one of the hottest holiday gifts this season. It is a kind of hoverboard, a small item that keeps its user upright using infrared sensors, gyroscopes, and motors. You have probably seen them all over your city. You might even have been approached by a street seller.

The authorized version — licensed by Chen himself — is being made and distributed by Razor USA. Prices started at $1,000 and up, but competition from cheap knockoffs, selling for as low as $200, has brought the price for the authorized version to $600. Still, there are places online where you can get them for $200. If experience in new products in a guide to the future, in a year, they will be available for less than $100.

And truly, these knockoffs are everywhere. Small entrepreneurs are importing them from small manufacturers by the thousands and selling them on the streets. They are making and selling so fast that quality control has been… lax. There are anecdotal reports of explosions and sudden acceleration (parodies on this Saturday night live skit). Amazon has refused to sell many brands.

The patent has proven difficult to enforce. Razor is spending up to $1 million per week to sue unauthorized manufactures. It’s a reminder: it’s never enough just own the government-granted monopoly rights to produce something. It always costs money to enforce it. You have to investigate. You have to litigate. You have to win. And by the time that day comes, you might have lost vast market share.

If the product is popular enough, the task is essentially hopeless. The resources and time expended on patent enforcement might instead of gone to innovation and marketing toward actually making profits. Enforcing a monopoly isn’t necessarily the same as making money. Indeed, it is the opposite.

The Case of Eli Whitney
The hoverboard saga brings to mind the history of one of the 19th-century’s most famous inventions: the cotton gin. The holder of the patent was Eli Whitney. A year after his graduation from Yale, he designed and constructed an improvement in the cotton gin — a technology that had existed since the ancient world. He obtained the patent on a single feature, a brush-like extension that improved the way the seeds were extracted from the cotton.

According to Boldrin and Levine, Eli and his partner Phineas Miller has dreams of getting rich with a monopoly pricing scheme. They would install their machines throughout the South and ask a royalty of two fifths, payable in ginned cotton. This prospect seriously annoyed farmers throughout the region, understandably.

So it became a common practice for farmers to reverse engineer the innovation — not a difficult thing to do. Rather than lease the Whitney machine, they would just make their own. Does this violate anyone’s rights? Of course not. A design of a contraption is made scarce and “owned” only by legislation. To forcibly prevent farmers from making their own machines is actually an invasion of their rights.

Still, with the prospect of riches dancing in his head, Eli and Phineas set out to sue every farmer who reverse engineered their design. “Whitney and Miller spent a lot of time and money trying to enforce their patent on the cotton gin, but with little success,” write Boldrin and Levine. “Between 1794 and 1807 they went around the South bringing to court everyone in sight, yet received little compensation for their strenuous efforts.”

Meanwhile, the gin led to vast increases in productivity. The cotton industry boomed. But the holders of the patent became ever poorer.

Fortunately, the story ends well. Whitney learned that suing people is less profitable than actually marketing products. His next project was to invent a machine that created interchangeable parts for muskets. Having learned his lesson, he did not seek a patent for his innovation. He just got busy right away and began selling. (His main customer, as it turns out, became the US Army.)

He finally did strike it big. As Boldrin and Levine summarize the lesson: “It was not as a monopolist of the cotton gin, but rather as the competitive manufacturer of muskets that Whitney finally became rich.”

Will Shane Chen Learn the Lesson?
The hoverboard, like the cotton gin, is in enormous demand. All the government power is the world will not prevent hundreds of manufacturers from making them, driving the price down and down until everyone can afford one. That one million per week that Razor is spending on trying to stop copycats is probably better spent on marketing and innovation — actually selling stuff rather than trying to prevent others from selling stuff.

Absent the government regulation, how can innovators make money? They have the first-mover advantage. This is what provides a period of high profitability before others get in on the act. This is the competitive market at work, inspiring everyone to serve the customer ever more faithfully through lower prices and better products.

Another factor that gives advantage to the innovators is trust. Even now, you can go to the drug store and see name-brand products living alongside store-branded products. Both make money. Both appeal to certain market segments. One producer’s gain does not necessarily come at the expense of other producers, unless the government intervenes.

It is common wisdom to say that the patent system is broken. But what is broken about it? It’s not that the system is abused. It is that it is used at all. Industrial monopolies achieved through government grants of special privileges create waste — and the ongoing lawsuits concerning the hoverboard are a case in point.

Whether it is ginning cotton or zipping around on city sidewalks, a true innovative society encourages as much production and innovation as possible, in service of the masses who love the newest and coolest thing.

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook. 

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

The New Renaissance Hat
Louis Rouanet
April 17, 2015

Michel Chevalier (1806–1879) was a very influential French economist during the second half of the nineteenth century. He is still widely known in France for being the architect of the Cobden-Chevalier Treaty of 1860 which was the free-trade agreement between France and Great Britain. Michel Chevalier is, however, less known for his major contribution to the intellectual property debate. [1] Contrary to Jean Baptiste Say, Gustave de Molinari, and many other French economists, Chevalier fiercely opposed the patent system. As Fritz Machlup remarked: “Among French economists, Michel Chevalier was probably the most emphatic in the joint antagonism to tariffs and patents, declaring that both ‘stem from the same doctrine and result in the same abuses.’”

Taking a fresh look at Michel Chevalier’s major work, Les Brevets d’invention (1878), we find it to be not only a well-written and powerful book, but also has remained impressively relevant. The arguments advanced by Chevalier anticipate the current arguments of the present opponents of intellectual property.

Patents as Contrary to Freedom and Economic Progress

Michel Chevalier argues that patents cannot be justified if they are contrary to freedom, even if beneficial to technological change. For him “From the moment we can make effective the patent only through inquisitorial expedients, violence, and subversion of liberty of labor, it is proof that we must renounce patents.” Chevalier rejects utilitarianism as a sufficient method to justify or refute the patent system. Chevalier’s opposition to patents, however, is not just based on moral arguments but shows the disastrous effects of this system for both foreign trade and the economy in general.

According to Chevalier, patents are of the same nature as privileges and monopolies which were prevalent during the Ancien Régime. They are also comparable in their effects to protectionist policies:

In absolute terms, patents diminish the productive power of nations that recognize them: evident proposition for those who believe that freedom, free competition, is the great lever of industrial progress.

Chevalier goes on to note the conservative and anti-innovation nature of monopolies and gives many examples of monopolies during the Ancien Régime. According to him, the innovators during the Ancien Régime weren’t rewarded, not because of the absence of patents, but because of the corporation guild system which was destroying competition and freedom to entry into markets. Thus, the innovators were constantly sued by guilds and consumers rarely benefited from their inventions. This argument is still relevant today. Indeed, companies protected from competition and government-owned corporations are often less innovative and more subject to conservative measures. Sectors typically run by government such as schools experience very little technological progress. On the other hand, the competitive process of the market gives incentives for the actors to differentiate from the other producers. As Pascal Salin stated, the company which makes the highest profits on a free market is the company which is the best positioned to “invent the future.” The essential virtue of competition is that it encourages producers to innovate in order to better serve the needs of consumers.

As one of his more striking examples, Chevalier examines the case of aniline — a dye and major innovation in the chemical industry — and shows how monopoly, resulting from patents, leads to hampered innovation. His interpretation of the problems caused by patents in the chemical industry at the time is consistent with more recent studies done by Boldrin and Levine in Against Intellectual Monopoly, now the seminal work on the topic.

Innovation as a Process

Chevalier understood that innovation is, above all, a process and that giving privileges to the innovator will destroy this process, leading to less and not more inventions. He wrote:

Every industrial discovery is the product of the general ferment of ideas, the result of an internal work which was accomplished with the support of a large number of successive or simultaneous collaborators in society, often for centuries.

This argument regarding the cumulative nature of innovation is still the most powerful argument against intellectual monopoly today and has also been the theme of several recent studies.2 Similar to Chevalier, Hayek saw innovation as a process and stated that “it is not obvious that such forced scarcity [intellectual property] is the most effective way to stimulate the human creative process.”

In an 1862 debate in the Académe des Sciences Morales et Politiques, Chevalier gave the example of Louis Daguerre, one of the inventors of photography, who didn’t seek a patent for his system of photography. According to Chevalier, the absence of a patent led to necessary improvements of the daguerreotype and fostered its widespread use. His conclusion is the following:

The spirit of man proceeds only by successive trials and repeated attempts. Discoveries do not arrive with a single bound to the degree of perfection or completion, which is reserved for them; there must be renewed, persevering efforts, cut by breaks that allow, so to speak, to breath. … If it is true that the invention must pass through the hands of twenty people before reaching its final state, it follows that the exclusive privilege granted to the first patented, and to each of his followers, prevents this practical result rather than facilitate it.

The Increasing Number of Patents and Negative Consequences

Already during the nineteenth century, legal instability and uncertainty challenged the actual efficiency of the patent system and the economists were very much aware of this problem. Chevalier warned that the patent system would lead to legal uncertainty for the companies and would lead the industry back to a guild system where no entrepreneur would dare to enter a market for fear of being sued by patent holders. Chevalier was ahead of his time by denouncing what can be considered the ancestors of today’s patent trolls.

Chevalier concluded his 1862 article by stating: “I think I have said enough to show that the patent legislation has been an eccentricity of the legislator.” He went further in 1863 and added that “[a]ll friends of industrial and social progress must work together to rescue the industry of obstacles, obsolete remains of the past. Patents must disappear first.” [3]

1. Fritz Machlup and Edith Penrose briefly discussed Michel Chevalier in “The Patent Controversy in the Nineteenth Century,” Journal of Economic History, 1950.

2. See Alberto Galasso et Mark Schankerman, “Patents and Cumulative Innovation: Causal Evidence from the Courts”, NBER working paper, 21 June 2014 ; and also, Alessandro Nuvolari, “Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine,” Cambridge Journal of Economics 28, No. 3 (2004).

3. Quoted in Eugène Pouillet, “Traité théorique et pratique des brevets d’invention et de la contrefaçon,” 1909, pp. x–xi.

Louis Rouanet is a student at Sciences Po Paris (Institute of Political Studies) where he studies economics and political science.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

The FDA: A Pain From the Neck to the Big Toe – Article by Mark Thornton

The FDA: A Pain From the Neck to the Big Toe – Article by Mark Thornton

The New Renaissance Hat
Mark Thornton
October 25, 2013

I recently experienced severe pain in my feet, particularly in the big toes. In my imagination it felt like my feet had been run over by a truck and that several of my toes had been broken. But I knew that was not the case, and that the pain came on slowly at first, and then spread to other parts of my feet until I could barely walk.

My first approach was to take some ibuprofen to relieve the pain and swelling. When this did not resolve the matter, I thought perhaps a new pair of soft shoes might work. That idea also failed, and with a little internet research I realized I had a classic case of the gout. I was soon off to see my doctor to determine what the problem was and to get it solved with the powers of modern medicine.

The doctor confirmed that I had the gout. I was not pleased to find out, that in my case, the gout was probably brought on by another drug that I had been taking daily, against my better judgment. However, I was pleased to learn that I would no longer have to take it, that as part of my treatment I was being prescribed an ancient and natural drug, and that I would only have to take this drug “as needed.”

I was off to get my prescription filled at the pharmacy when a thought came to mind: if this drug was as natural and ancient as advised by my doctor, why did I need a prescription in the first place? Upon inspection the prescription was for Colcrys, the brand name of the drug colchicine. Furthermore, when I picked up my prescription the price was much higher than I anticipated given that it was a natural drug. When questioned, the pharmacy technician replied that the actual price was much higher and that my insurance paid for more than three-quarters of the bill. The cash price (without insurance) was $198.99 which is $6.63 per pill if taken daily, or nearly $20 per dose if used to treat flare-ups.

An extremely high price for an ancient natural drug? I knew I had a new case to solve and that the solution was probably the same old answer.

After conducting some research on Wikipedia, I learned the following: Colchicine can be used to treat gout, Behcet’s disease, pericarditis, and the Mediterranean fever. It has been in use as a medicine for over 3,000 years. After serving as ambassador to France, Benjamin Franklin brought colchicum plants back to America in order to treat his own gout. Modern science has further refined the drug for better medicinal use.

Colcrys has been used to treat gout for a very long time, although the Food and Drug Administration (FDA) had not approved Colcrys specifically for the treatment of gout prior to 2009. Alternative drugs, such as Allopurinal, are also used to treat gout and related ailments. Until recently, you could treat your own gout using one of these medicines for pennies a day.

In the summer of 2009, the Food and Drug Administration approved Colcrys as a treatment for gout flare-ups and the Mediterranean fever. The FDA gave pharmaceutical company URL Pharma an exclusive marketing agreement for selling Colcrys in exchange for completing studies on Colcrys and paying the FDA a $45 million application fee.

This deal effectively created a patented drug with no generic alternative. Therefore it gave the company a monopoly for the duration of the agreement. URL Pharma immediately raised the price from less than a dime to nearly $5 dollars per pill. Comprehensive medical insurance does substantially reduce the price to consumers, but it does not reduce the cost. Insurance only spreads the cost-burden across policy holders.

At the same time, doctors are encouraged by pharmaceutical companies to employ more expensive and profitable treatments. As a result the overall cost burden increases. Evidence suggests that doctors are prescribing Colcrys in large volumes to treat gout flare-ups and as a long-term preventative measure.

Once again the federal government has taken something that was both cheap and beneficial and turned it into a monopoly that hurts the general public and drives up the cost of medical care to the benefit of Big Pharma.

Note: Just because it is natural and produced in a pharmaceutical environment, does not mean that Colcrys is harmless. It can be considered toxic in large amounts, has a long list of possible side effects, and is not recommended for people with certain conditions.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton’s article archives.

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This article was published on and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Against Monsanto, For GMOs – Video by G. Stolyarov II

Against Monsanto, For GMOs – Video by G. Stolyarov II

The depredations of the multinational agricultural corporation Monsanto are rightly condemned by many. But Mr. Stolyarov points out that arguments against Monsanto’s misbehavior are not valid arguments against genetically modified organisms (GMOs) as a whole.


– “Against Monsanto, For GMOs” – Essay by G. Stolyarov II
– “Monsanto – Legal actions and controversies” – Wikipedia
– “Copyright Term Extension Act” – Wikipedia
– “Electronic Arts discontinues Online Pass, a controversial form of video game DRM” – Sean Hollister – The Verge – May 15, 2013
– “Extinction” – Wikipedia

Against Monsanto, For GMOs – Article by G. Stolyarov II

Against Monsanto, For GMOs – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
June 9, 2013

                The depredations of the multinational agricultural corporation Monsanto are rightly condemned by many. Monsanto is a prominent example of a crony corporation – a company that bolsters its market dominance not through honest competition and innovation, but through the persistent use of the political and legal system to enforce its preferences against its competitors and customers. Most outrageous is Monsanto’s stretching of patents beyond all conceivable limits – attempting to patent genes and life forms and to forcibly destroy the crops of farmers who replant seeds from crops originally obtained from Monsanto.

                Yet because Monsanto is one of the world’s leading producers of genetically modified crops, campaigners who oppose all genetically modified organisms (GMOs) often use Monsanto as the poster child for the problems with GMOs as a whole. The March Against Monsanto, which took place in cities worldwide in late May of 2013, is the most recent prominent example of this conflation. The blanket condemnation of GMOs because of Monsanto’s misbehavior is deeply fallacious. The policy of a particular company does not serve to discredit an entire class of products, just because that company produces those products – even if it could be granted that the company’s actions result in its own products being more harmful than they would otherwise be.

                GMOs, in conventional usage, are any life forms which have been altered through techniques more advanced than the kind of selective breeding which has existed for millennia. In fact, the only material distinction between genetic engineering and selective breeding is in the degree to which the procedure is targeted toward specific features of an organism. Whereas selective breeding is largely based on observation of the organism’s phenotype, genetic engineering relies on more precise manipulation of the organism’s DNA. Because of its ability to more closely focus on specific desirable or undesirable attributes, genetic engineering is less subject to unintended consequences than a solely macroscopic approach. Issues of a particular company’s abuse of the political system and its attempts to render the patent system ever more draconian do not constitute an argument against GMOs or the techniques used to create them.

                Consider that Monsanto’s behavior is not unique; similar depredations are found throughout the status quo of crony corporatism, where many large firms thrive not on the basis of merit, but on the basis of political pull and institutionalized coercion. Walt Disney Corporation has made similar outrageous (and successful) attempts to extend the intellectual-property system solely for its own benefit. The 1998 Copyright Term Extension Act was primarily motivated by Disney’s lobbying to prevent the character of Mickey Mouse from entering the public domain. Yet are all films, and all animated characters, evil or wrong because of Disney’s manipulation of the legal system instead of competing fairly and honestly on the market? Surely, to condemn films on the basis of Disney’s behavior would be absurd.

                Consider, likewise, Apple Corporation, which has attempted to sue its competitors’ products out of existence and to patent the rectangle with rounded corners – a geometric shape which is no less basic an idea in mathematics than a trapezoid or an octagon. Are all smartphones, tablet computers, MP3 players, and online music services – including those of Apple’s competitors – wrong and evil solely because of Apple’s unethical use of the legal system to squelch competition? Surely not! EA Games, until May 2013, embedded crushingly restrictive digital-rights management (DRM) into its products, requiring a continuous Internet connection (and de facto continual monitoring of the user by EA) for some games to be playable at all. Are all computer games and video games evil and wrong because of EA’s intrusive anti-consumer practices? Should they all be banned in favor of only those games that use pre-1950s-era technology – e.g., board games and other table-top games? If the reader does not support the wholesale abolition, or even the limitation, of films, consumer electronics, and games as a result of the misbehavior of prominent makers of these products, then what rationale can there possibly be for viewing GMOs differently?

                Indeed, the loathing of all GMOs stems from a more fundamental fallacy, for which any criticism of Monsanto only provides convenient cover. That fallacy is the assumption that “the natural” – i.e., anything not affected by human technology, or, more realistically, human technology of sufficiently recent origin – is somehow optimal for human purposes or simply for its own sake. While it is logically conceivable that some genetic modifications to organisms could render them more harmful than they would otherwise be (though there has never been any evidence of such harms arising despite the trillions of servings of genetically modified foods consumed to date), the condemnation of all genetic modifications using techniques from the last 60 years is far more sweeping than this. Such condemnation is not and cannot be scientific; rather, it is an outgrowth of the indiscriminate anti-technology agenda of the anti-GMO campaigners. A scientific approach, based on experimentation, empirical observation, and the immense knowledge thus far amassed regarding chemistry and biology, might conceivably give rise to a sophisticated classification of GMOs based on gradations of safety, safe uses, unsafe uses, and possible yet-unknown risks. The anti-GMO campaigners’ approach, on the other hand, can simply be summarized as “Nature good – human technology bad” – not scientific or discerning at all.

                The reverence for purportedly unaltered “nature” completely ignores the vicious, cruel, appallingly wasteful (not even to mention suboptimal) conditions of any environment untouched by human influence. After all, 99.9% of all species that ever existed are extinct – the vast majority from causes that arose long before human beings evolved. The plants and animals that primitive hunter-gatherers consumed did not evolve with the intention of providing optimal nutrition for man; they simply happened to be around, attainable for humans, and nutritious enough that humans did not die right away after consuming them – and some humans (the ones that were not poisoned, or killed hunting, or murdered by their fellow men) managed to survive to reproductive age by eating these “natural” foods. Just because the primitive “paleo” diet of our ancestors enabled them to survive long enough to trigger the chain of events that led to us, does not render their lives, or their diets, ideal for emulation in every aspect. We can do better. We must do better – if protection of large numbers of human beings from famine, drought, pests, and prohibitive costs of food is to be considered a moral priority in the least. By depriving human beings of the increased abundance, resilience, and nutritional content that only the genetic modification of foods can provide, anti-GMO campaigners would sentence millions – perhaps billions – of humans to the miserable subsistence conditions and tragically early deaths of their primeval forebears, of whom the Earth could support only a few million without human agricultural interventions.

                We do not need to like Monsanto in order to embrace the life-saving, life-enhancing potential of GMOs. We need to consider the technology involved in GMOs on its own terms, imagining how we would view it if it could be delivered by economic arrangements we would prefer. As a libertarian individualist, I advocate for a world in which GMOs could be produced by thousands of competing firms, each fairly trying to win the business of consumers through the creation of superior products which add value to people’s lives. If you are justifiably concerned about the practices of Monsanto, consider working toward a world like that, instead of a world where the promise of GMOs is denied to the billions who currently owe their very existences to human technology and ingenuity.

The Patent Bubble and Its End – Article by Jeffrey A. Tucker

The Patent Bubble and Its End – Article by Jeffrey A. Tucker

The New Renaissance Hat
Jeffrey A. Tucker
February 3, 2013

“Then they pop up and say, ‘Hello, surprise! Give us your money or we will shut you down!’ Screw them. Seriously, screw them. You can quote me on that.”

Those are the words of’s chief legal officer, Lee Cheng. He was speaking to following a landmark ruling that sided with a great business against a wicked patent troll company called Soverain.

What is a patent troll? It is a company that has acquired patents (usually through purchases on the open market) but does not use them for any productive purpose. Instead, it lives off looting good companies by blackmailing people. The trolls say, “Pay us now or get raked over the coals in court.”

Soverain is one such company. Most companies it has sued have paid the ransom. Soverain has collected untold hundreds of millions in fines from the likes of Bloomingdale’s, J.C. Penney, J. Crew, Victoria’s Secret, Amazon, and Nordstrom.

It sounds like a criminal operation worthy of the old world of, say, southern Italy (no offense, guys!). Indeed, but this is how it works in the U.S. these days. The looting is legal. The blackmail is approved. The graft is in the open. The expropriation operates under the cover of the law. The backup penalties are inflicted by the official courts.

To be sure, the trolls may not be as bad as conventional patent practice. At least the trolls don’t try to shut you down and cartelize the economy. They just want to get their beak wet. Once that happens, you are free to go about your business. This is one reason they have been so successful.

Soverain’s plan was to loot every online company in existence for a percentage of their revenue, citing the existence of just two patents. Thousands of companies have given in, causing an unnatural and even insane increase in the price of patent bundles. Free enterprise lives in fear.

Let me add a point that Stefan Molyneux made concerning this case. The large companies are annoyed by the patent-troll pests but not entirely unhappy with their activities. The large companies can afford to pay them off. Smaller companies cannot. In this way, the trolls serve to reduce competition.

[Stefan made his comments on an edition of Adam v. The Man, in which we were both guests. you can watch the entire show here.]

When Soverain came after Newegg’s online shopping cart demanding $34 million, a lower court decided against Newegg, but only imposed a fine of $2.5 million. Newegg examined the opinion and found enough holes in the case to appeal. It was a gutsy decision, given the trends. But as Cheng told Ars Technica:

“We basically took a look at this situation and said, ‘This is bull****.’ We saw that if we paid off this patent holder, we’d have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now nobody has to pay Soverain jack squat for these patents.”

It’s true. The case not only shuts down the Soverain racket. It might have dealt a devastating blow to the whole patent hysteria and the vicious trolling that has fueled it all along.

And truly, the patent mania has become crazy. No one 10 years ago would have imagined that it would go this far.

“It’s a sign of something gone awry, not a healthy market,” attorney Neil Wilkof told, with reference to the utterly insane amounts that well-heeled tech giants have been paying for patents. “I think we’re in a patent bubble in a very specific industry. It’s a distorted market and misallocation of resources.”

[Note: This entire racket is anticipated and debunked in the pioneering work on the topic. The new edition of Stephan Kinsella’s Against Intellectual Property is now available for free to Club members.]

Earlier this year, Google shelled out $12.5 billion for the acquisition of Motorola Mobility. Facebook threw down $550 million for AOL’s patents. Apple and Google spent more last year on patent purchases and litigation than on actual research and development. The smartphone industry coughed up $20 billion last year on the patent racket. A lawsuit last year against Samsung awarded Apple $1 billion in a ridiculous infringement case.

These are astronomical numbers — figures that would have been inconceivable in the past. Everyone seems to agree that the system is radically broken. What people don’t always understand is that every penny of this is unnecessary and pointless. This market is a creation of legislation, and nothing more. The companies aren’t really buying anything but the right to produce and the right not to be sued, and that is not always secure.

Let’s back up. Why are there markets in anything at all? They exist because goods have to be allocated some way. There are not enough cars, carrots, and coffee to meet all existing conceivable demand. We can fight over them or find ways to cooperate through trade. Prices are a way to settle the struggle over goods that people grow or make, or services people provide, in a peaceful way. They allow people to engage to their mutual benefit, rather than club or shoot each other.

But what is being exchanged in the patent market? It’s not real goods or services. These are government creations of a bureaucracy — an exclusive right to make something. They are tickets that make production legal. If you own one, there is no broad market for it. It has only a handful of possible buyers, and the price of your good is based entirely on how much money you think you can extract from deep pockets. Sometimes, you actually force people to buy with the threat that you will sue if they don’t.

That’s not how normal markets operate. There was a time when patents didn’t even apply to software at all. The whole industry was built by sharing ideas and the spirit of old-fashioned competition. Companies would work together when it was to their mutual advantage and hoard competitive reasons when it was not. It seemed to work fine, until legislation intervened.

Today the entire fake market for patents is sustained by the perception that courts will favor the patent holders over the victims. The Newegg case changes that perception, which is why it has been the most closely watched case in the industry. This might signal the end of the reign of terror, at least one form of it.

But, you say, don’t creators deserve compensation? My answer: If they create something people are willing to pay for, great. But that’s not what’s happening. Soverain’s bread and butter was a handful of patents that had been on the open market, changing hands through three different companies over the course of 10 years, until they landed in the laps of some extremely unscrupulous wheeler-dealers.

In other words, patents these days have little to nothing to do with the creators — any more than mortgage-backed securities at the height of the boom had anything to do with the initial lender and its risk assessments. Once a patent is issued — and they are not automatically valid, but rather have to be tested in litigation — it enters into the market and can land anywhere. The idea that the patent has anything to do with inspiring innovation is total myth. It is all about establishing and protecting monopolistic weapons with which to beat people.

Many people have been hoping for patent reform. It probably won’t happen and might not even need to happen. If this case is as significant as tech observers say, a sizeable portion of this fake industry could be smashed via a dramatic price deflation. When something is no longer worth much, people stop wanting it.

Patents date from a time when a great industrial innovation made the headlines just because it was so rare. That’s not our world. Government has no business allocating and centrally planning ideas. Here’s to Newegg: Take a bow. Someone had the guts to say no. This time, for once, it worked.

Jeffrey Tucker

Jeffrey Tucker is the publisher and executive editor of Laissez-Faire Books, the Primus inter pares of the Laissez Faire Club, and the author of Bourbon for Breakfast: Living Outside the Statist Quo It’s a Jetsons World: Private Miracles and Public Crimes, and A Beautiful Anarchy: How to Build Your Own Civilization in the Digital Age, among thousands of articles. Click to sign up for his free daily letter. Email him: | Facebook | Twitter | Google.

This article has been republished pursuant to a Creative Commons Attribution 3.0 License.

Independence from ACTA Day – July 4, 2012 – Video by G. Stolyarov II

Independence from ACTA Day – July 4, 2012 – Video by G. Stolyarov II

July 4 now has a new meaning: it is the day European pro-liberty activists helped humankind declare independence from the powerful special interests that attempted to impose censorship, online surveillance, and draconian stifling of creativity via the misnamed Anti-Counterfeiting Trade Agreement (ACTA).

Following the rejection of ACTA in the European Union Parliament by a vote of 478 to 39, ACTA is effectively dead. A great threat to human civilization is averted.

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– “ACTA: The War on Progress, Freedom, and Human Civilization” – Essay by G. Stolyarov II
– “Victory! ACTA Suffers Final, Humiliating Defeat in European Parliament” – Rick Falkvinge
– “Anti-Counterfeiting Trade Agreement” – Wikipedia