The business of innovationEconomists: Markets outperform patents in promoting intellectual discovery

In 1938, with fascism, Nazism, and communism appearing to be on the ascendancy, the English novelist E. M Forster wrote Two Cheers for Democracy, a book of essays staunchly defending the democratic alternative to these dark forces. Forty years later, Irving Kristol, the neoconservative guru, published Two Cheers for Capitalism, a collection of essays extolling the virtues of the free market system. A California Institute of Technology (Caltech)-led team of researchers has just come out with interesting insights into the free market which lend support to Kristol’s thesis. They argue that when it comes to intellectual curiosity and creativity, a market economy in which inventors can buy and sell shares of the key components of their discoveries actually beats out the winner-takes-all world of patent rights as a motivating force.

In a paper published in this week’s issue of Science, an international team of researchers led by Peter Bossaerts, the William D. Hacker Professor of Economics and Management and professor of finance at Caltech, and Swiss Finance Institute Professor at the Ecole Polytechnique Federale Lausane in Switzerland, describes a series of experiments designed to quantify the different ways patent systems and market forces might influence a person’s drive to invent, to solve intellectual problems.

Over the last hundred-plus years, the patent system has been the gold standard by which we’ve protected and tried to incentivize intellectual discovery. Bossaerts and his team — which includes Debrah Meloso from Bocconi University in Milan, Italy, and Jernej Copic from the University of California, Los Angeles — now say there is a new game in town. Or, rather, an old game — the same free-market forces that drive so much of our economy.

The problem with patents, Bossaerts explains, is that they “give the prize to the winner only. Whoever comes in second or third walks away empty.” This means that, for the patent system to work well, “a large number of people need to think they are the absolute best.” The economic theory that motivated patent regulation even assumes that all people have an equal chance of being the best, he adds.

In reality, Bossaerts says, this is not how people think. Very few of us think we are the person most likely to come up with a unique solution to a problem before anyone else — and so very few of us are likely to even try to solve a difficult problem. We just assume that someone else will