Monday, July 21, 2008

Ice cream and patents

Hot days and ice cream.

An old post of mine over on the Blog at Mises.org.








Ice cream and patents


It's another hot summer day and nothing cools the heat like a large cone of ice cream. Due to our relatively free economy, I have the choice between many different sellers, brands, and types of the frozen treat. A relatively new concept is one where ice cream shops mix your choice of ice cream and toppings on a super-cooled stone slab before placing the mix in a cone. Someone, somewhere, conceived of this recipe and sought investors to bring it to market. Based on patent logic, no one would have invested time and money on this new idea unless he was protected by a government-issued, government-enforced patent.


Don't tell that to the entrepreneurs and investors who have brought similar, and successful, ideas to stores near you. I can go to either a local
Cold Stone Creamery or a Marble Slab Creamery when I finally succumb to the heat later this afternoon. Ok, one does use a granite slab while the other uses marble, but their concepts are close enough that, supposedly, any opportunity for entrepreneurial profit ends once competitors begin opening stores down the street.

Based on patent logic, gone is the ability to earn back the capital invested in order to bring this idea to market. Any hope for a return on investment and profit disappears, and the entrepreneur is simply left with his managerial income. This is due to other entrepreneurs seeking profit by entering the stone slab ice cream market and driving profit out of the financial picture. The uncertainty of a return on investment due to competitors quickly adopting a new idea stops development of that idea, thus hampering the market. Or, so the patent logic goes.

As the market continually shows, patent logic is false. Pure competition works in the ice cream market, so it will certainly work in all markets. Rothbard was right, patents are not needed in any market, whether pharmaceutical or ice cream.

Lucky for me, and my sweet tooth, patent logic is false and I get to face the cool decision of which slab to use as the base of my next ice cream cone. Granite or marble, which will it be?

2 comments:

Paul said...

Jim:

I am both a business investor and a patent holder (#6,956,545), and absolutely agree with you.

Even if I disagreed with you about the need for patents, the U.S. patent system is so screwed up that it has become more a liability to business than a benefit. The only folks profiting from it appear to be the lawyers and the drug companies.

For companies like ours, patent filings are necessary as a defensive measure - to keep other companies from filing patents on technologies close to ours then suing us in an attempt to take away our ability to use our own ideas, or to extort license fees from us. For a startup, the sheer expense of mounting a defense to a patent infringement suit is enough to put us out of business.

Some old friends of mine have a consulting practice whose primary service is to help AOL Time Warner defend itself against patent infringement suits brought by people who hope to hit the lotto by suing AOL, which now (jointly with Verizon) owns all the intellectual property developed by CompuServe prior to 1998. Much of what we developed was done before IT stuff could be patented, so AOL needs to produce 'prior art' showing that CompuServe invented and used various technologies in the pre-Internet days.

When my partners and I started looking for hardware engineering firms to design and build our product, we came in contact with a couple of Chinese companies who wanted to do the work. When we started asking about intellectual property rights, they weren't interested. Apparently the norm in China is that everyone steals ideas from everyone else, and they let the market sort it out. This is just one of the reasons why their manufacturing costs are among the lowest in the world (with the primary being simply that their workers accept lower salaries than most Western workers).

But lastly, I have to ask how your views on patents jive with your views on property rights.

If your position is that companies who wish to protect their ideas need to do so by keeping them secret, and if the secret is penetrated, too bad -- isn't that the same as saying a homeowner is obligated to have locks to keep others from trespassing (e.g. harmlessly crossing another's property to get to get a bucket of water from a stream)?

PL

Jim Fedako said...

Paul,

Intellectual property rights are the proverbial can of worms. There is no agreement within the libertarian camp as to how such rights should be properly defined.

For a starting point: I define property rights in the manner of John Locke; you own that which now includes your labor. This property must be land, or that which flows from land.

Of course, the issue at hand is rights to intangible property. Consider patents versus copyrights. Everything is copyrighted once it becomes tangible – written on paper or other recording device. Authors and songwriters – and software folks – apply for a copyright in order to have a government timestamp on the origination of the book, song, software, etc. But, even without a copyright from government, copyrights still exist in US law, and they are defendable.

The thing is that you and I can write the same song with neither of us violating the other’s copyright. The issue is whether one of us “stole” the material from the other – with the burden of proof of theft being placed on the accuser. You must show that I had prior knowledge of your material before “creating” mine.

My favorite spoof of copyrights occurred when some Australian artists attempted to copyright all possible tones used in landline phones. Of course, the courts would not have defended the artists’ copyright. But, it did illustrate the foolishness of “owning” intellectual property.

Patents are different – just as you noted. I can obtain a patent that is generic in nature, file it away, and wait for folks to “violate” it. In this instance, no one “stole” the intellectual property since the idea was the product of independent minds working without the knowledge of the other. Companies game this all the time.

The question remains: How can I “own” an idea that can also come to you at some later date? Here, the burden of proof rests with each subsequent “discoverer” of the idea. They have to “prove” that their idea is sufficiently different from yours, else you sue and they lose.

What does the holder of a patent actually own? There is nothing tangible; no labor was added to land or a product of land.

You showed that there are no economic efficiencies that can be attributed to patents. And, as I tried to point out in the post, the lack of patents does not stop entrepreneurs and capitalists from advancing society.

By the way, Mises accepted copyrights but not patents. Rothbard accepted neither.

Good places to start are Mises and Rothbard (of course), as well as Steve Kinsella – he writes regularly for Mises.org.