When I travel in developing countries, I’m always struck by the number of people – often men –not working during the day. Small groups of men sit under a tree “shooting the breeze.” This is more than just the difference between western and non-western societies. Whatever the cause, those non-working men represent untapped wealth potential – wealth that could provide clean water, childhood vaccinations, better roads, and solid schools.
It’s not cultural imperialism that makes me want to yearn to see these men – and women – engage in fulfilling and productive work, both for their own sakes and for the sakes of the families and communities. We were made to work before the Fall, during this in-between time, and in heaven. Work is good for us, and it blesses the world. Through work, we are fruitful and we flourish.
One of the questions that impact investing tries to tackle is how to unlock human capital sitting under the tree to create wealth – wealth that far exceeds all of the foreign aid and philanthropic dollars. How to release that capital has no simple answer. Jobs are an important part of that answer. Same with virtue, family, community, and faith.
Patent Rights Produces Prosperity
But one often overlooked answer is strengthening the laws governing intellectual property, thereby incentivizing people to invent. And innovation is important both as a means of wealth creation and a component of human flourishing.
It’s well established that property rights are critical to stimulating wealth creation. No one builds an addition to a home they’re renting. Nor does a slum-dweller who knows that improving his shack means that the neighborhood thugs are going to confiscate his home with impunity. Without secure and reliable property rights, there is no incentive to upgrade.
The same is true with intellectual property. There is a disincentive to develop an invention if someone else can just take it without paying for it. Humans generally need more than altruistic motivations to expend the time, money, and risk required to innovate. We need a financial incentive. Abraham Lincoln, the only U.S. President to receive a patent,[1] said that the patent system “added the fuel of interest to the fire of genius.” It’s not enough to be smart. Financial incentives provide the fuel to unlock genius.
Innovation requires much more than an idea popping into your head in the shower. Thomas Edison famously said that “Genius is one percent inspiration and 99 percent perspiration.” Pharmaceuticals take more than 10 years[2] and on average more than one billion dollars to bring to market.[3] Even wireless mobile technology can take millions of dollars and a decade to launch. Research and development costs for most valuable inventions are high.
Some people have argued that patents help the rich and hurt the global poor.[4] They look at a pill that costs just pennies to manufacture and the huge profits garnered by pharmaceutical companies and conclude that the system is rigged. But these critics seem not to understand that the expensive drug never would have been invented without a potentially large payoff. Furthermore, in the U.S., just 52 percent of all patent applications are approved.[5]
And only one in 5,000 new drugs will ever make it to market.[6] It’s better to have an expensive drug that exists (and whose price will fall when the patent expires) than a cheap drug that doesn’t exist. It’s like the old joke about eggs in the Soviet Union: the good news is they were only a dime a dozen, but the bad news is there were no eggs. Remove the financial incentive to invent and you end up with no inventions.
There’s a reason the United States has led the world in innovation. The Founders put into Article I, Section 8 of the U.S. Constitution the only positive right to appear before the amendments were added: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” This sentence propelled Americans to become inventors. There’s nothing special about American DNA. We’re an inventive people because we have a constitutionally enshrined financial incentive to invent. Take away that incentive and other nations will overtake us as invention leaders.[7]
Innovation is a key reason that America became a rich nation. The United States democratized invention, making anyone eligible to apply for a patent, unlike the more aristocratic system in the Old World which required knowing the right people or having money to begin with.[8] This egalitarian opening of the doors of innovation led America to prolific and important discoveries that eventually resulted in per capita GDP in the U.S. to exceed that of the mother country.
Stanford University Professor Dr. Stephen Haber cogently argues “There are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights.”[9] Patent rights transform even backward, agrarian economies like the American colonies into innovation machines. Culture and worldview are undoubtedly variables that affect invention, but the financial incentive bred by legal protections for inventions that are “useful, novel, and non-obvious” (the three tests to determine whether an invention is worthy of patent protection) make all the difference.
Dr. Haber demonstrates the dramatic relationship between strong and enforceable patent rights and per capita GDP in the below chart. Patent rights bring wealth, plain and simple.
Dr. Haber argues that without property rights, “no one will specialize in anything; everyone will be an inefficient jack-of-all-trades. The level of economic development in your society will be stunningly low. It would be nice if this were a parable. Sad to say, it describes much of the developing world.”[10] And that’s a huge problem that needs to be addressed. Yes, the developing world needs clean water and basic health care and infrastructure and a host of other things. But to truly boost its economy, it needs to incentive its citizens to reach their God-given potential to be innovators.
There is another benefit that flows from strong patent rights: the dissemination of knowledge. In contrast to trade secrets, patents are made public, enabling people to know where intellectual property exists and explaining how the invention works. This information sharing educates the general population and empowers would-be inventors to build on top of that invention or even to work around it to avoid paying licensing fees. Often, work-around inventions compete with the original invention and create a “horse-race” environment. Invention begets invention.
Enforceable Patent Rights Requires the Rule of Law
Strong patent laws are necessary but not sufficient to breed prosperity. Good laws must be enforceable. What good is a sound law that is not equally applicable to all people regardless of class, religion, gender, or tribe? As Gary Haugen and Victor Boutros persuasively argued in The Locust Effect,[11]one common characteristic of poor countries is that the poor and powerless do not have access to equal justice under law. Writing of the Rwandan genocide, Haugen and Boutros identify how ineffectual philanthropic aid is absent enforceable laws:
None of the other things that people of good will had sought to share with these impoverished Rwandans over the years was going to matter if those good people could not stop the machetes from hacking them to death. Moreover, none of those good things (the food, the medicine, the education, the shelter, the fresh water, the micro-loan) was going to stop the hacking machetes. The locusts of predatory violence had descended—and they would lay waste to all that the vulnerable poor had otherwise struggled to scrape together to secure their lives. Indeed, not only would the locusts be undeterred by the poor’s efforts to make a living, they would be fattened and empowered by the plunder.
Establishing the rule of law is a complex and long-term process that does not lend itself to simple fixes. It requires legal, cultural, and even spiritual remedies. Yet without it, good patent laws will prove worthless.
Human Flourishing
There’s a second, and arguably more important, reason to incentivize invention: human flourishing. It’s true that strong and enforceable patent rights lead almost invariably to prosperity, but prosperity isn’t as important as enlivening the human spirit. We are made in God’s image, and an essential element of being like God is our ability to create.
Think of the immense joy you get out of making something – a painting, a chair, a song, an algorithm, a sandcastle. This sense of fulfillment from a job well done leads to the flourishing of our spirits. Working, building, and creating is what we’re made to do, and providing incentives in law encourages us to become what God made us to be.
There is also a joy in appreciating and benefiting from others’ creations. When I get a new phone, I enjoy exploring it to find the latest inventions that enable me to do new things more easily. We’re not all made to be patent holders. Only a tiny percentage of the population will ever file for, much less receive a patent. But we are made to be creative, to greater or less extents and in varied fields.
And for those who do invent, the wealth they produce will extend far beyond just their own household. Look at the effect that great American companies like Microsoft or Qualcomm have had on their communities and the world, employing hundreds of thousands of people with good paying jobs and making life easier, more efficient, and more fruitful for billions of customers. Their brilliance has enriched life for the entire planet.
Conclusion
Patents and poverty don’t usually appear in the same sentence, but there is a close connection between them. Poverty alleviation – and poverty prevention – requires us to be creative and thoughtful. As we learn that philanthropy has its limits, so does business -- absent laws that will catalyze human ingenuity. Patent rights lie near the heart of unlocking capital in the developing world. It’s not enough to import “first world” inventions into poor countries. We need to cultivate a generation of inventors who can irrigate the economic desert to make it bloom with the fertile geni
[1] On May 22, 1849, Lincoln was granted patent No. 6,469 for a device to lift boats over shoals, an invention which was never manufactured. [2] http://phrma-docs.phrma.org/sites/default/files/pdf/rd_brochure_022307.pdf [3] “Changes in List Prices, Net Prices, and Discounts for Branded Drugs in the U.S., 2007-2018,” JAMA Network [4] https://www.pbs.org/newshour/economy/column-intellectual-property-rules-help-the-rich [5] https://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm [6] https://www.medicinenet.com/script/main/art.asp?articlekey=9877 [7] According to the U.S. Chamber of Commerce’s Global Innovation Policy Center, the U.S. patent regime has fallen out of first place in recent years. A string of Supreme Court decisions has steadily eroded inventors’ rights. Consequently, venture capital is now migrating out of the U.S. to startups in other countries, falling from 84 percent in 2004 to 52 percent in 2019. Source: National Venture Capital Association. [8] https://www.amazon.com/Democratization-Invention-Long-Term-Economic-Development/dp/0521747201 [9] http://www.georgemasonlawreview.org/wp-content/uploads/Haber-FINAL.pdf [10] http://www.georgemasonlawreview.org/wp-content/uploads/Haber-FINAL.pdf [11]https://www.thelocusteffect.com/