Monday, November 10, 2008

Innovation Without Patents

Libertarians see that in a free society, individuals would have more incentives to innovate, because of greater wealth and leizure time. From the absense of intellectual property in a free society, inventors would have more incentives to invent, due to decreased risk of inventing an already patented product. But supporters of intellectual property, however, see it as helpful to promote invention, even that it contradicts the non-aggression principle. Yes, because ``it's impossible to enforce morality," individuals will still advocate IP for pragmatic reasons. Even if some proponents of IP see it as immoral, they cannot help it so they still support it. We will, in response to them, thus argue that even in the absence of intellectual property, alternative systems that rewards the inventor exists in a free society.

The classical argument and criticisms

Let us start with the classical IP argument:

If the state does not reward the inventor for his inventions, then the inventor would not invent it in the first place.
Inventions always produce more good than non-invention, even at the cost of intellectual protectionism.
This is because the consumer wish to buy the invented good over others, even at a higher price from patent monopolies.

We will criticize some bad consequences of intellectual property. If two individuals made the same invention, then one will get sued. Therefore, individuals do not have much incentive to develop a new product, since the state may sue him for something already invented.

This happens often in software patents. The open source developers do not have much incentives to develop software anymore because they do not want to take the risk of getting sued, for developing software that someone else already patented.

Patent laws, also, result in firms having a monopoly over that idea. This would increase the mismanagement of many firms, and the monopoly firms tend to display bureaucratic tendencies.

Patents also forbid the improvement of many inventions over the entire patent term. Since statistics have shown that over 90% of all innovations improve an existing invention, eliminating patent laws might increase innovation.

Criticisms, however, do not entirely refute the proponents, since the proponents may think that the benefits overweigh the costs, advocating criticisms may not entirely make proponents deny their idea. Even if we have one thousand criticisms about the disadvantages of IP, the proponents may still think the benefits of IP outweigh the costs. We, therefore, will suggest better alternatives to intellectual property, instead of criticisms of IP, so the proponents of IP would have something better.

Utilizing creative destruction

Creative destruction means the destruction of some firms or sectors by innovation. As new firms with innovations enter the market, this destroys the old firms. As new firms with new innovations outcompete the old firms, the old firms will fail and the new firm would predominate. This process, even in the destruction of old firms, benefits the economy.

The classical entrepreneurial method

Entrepreneurs can utilize the creative destruction process to take rewards from their invention. As an inventor thoughts of an idea that may outcompete old firms, he forms a businesses to manufacture his invention, he could profit from it. But even temporary, some tiny inventions would profit a huge sum to the inventor, due to a high population demand for his invention.

But suppose, if an invention takes a long time to develop, and he cannot reap much profit even of high population demand, he has plenty of alternative methods to get even more profit.

Selling shorts

One example of how the inventor can profit from his invention comes from the stock market. Once an invention has released, we can imagine a large number of old businesses to fail, massive bankruptcies, and liquidation. But an inventor can exploit these business failures to profit from them. An inventor can utilize a strategy called short-selling.

The basic method goes something like this: An inventor first sell stocks that he does not own from the businesses that will fail from his invention. Then inventor establishes his own business but his idea spread quickly and other firms used his idea also. Eventually, the businesses will eventually outcompete the old businesses. Finally, after all of the old businesses failed, the inventor buys back these stocks from the failing businesses at a lower price. This would make the inventor profit at the difference of the price of the stock at the beginning and the lower price.

Though the bureaucratic corporations would not exist as much in a free society, the stock market will still exist. The inventor can leverage the stock market to profit from his invention, at almost any sector that has stocks.

Suppose an inventor, named Alice, invented a widget, called widget-A, and she keeps it secret. Alice eventually detects that widget-A would eventually outcompete widget-B, manufactured at some other firm, firm-B. As Alice reasonably believes that firm-B will go bankrupt as she releases his invention, she plans to profit from firm-B's bankruptcy.

Alice tries to profit from her invention, by selling shorts. She first borrows stock, and then sells the stock to firm-B. She starts her own firm, firm-A, to manufacture widget-A. But soon, other firms quickly used her invention and also manufactured her idea. She had only profited very little before other firms used her idea too. But she could also profit more until firm-B goes bankrupt.

Eventually, as almost every firm manufactured a widget-A from Alice's idea, firm-B that manufactures widget-B goes bankrupt. During this bankruptcy, the stocks from firm-B fell. She then buy the undervalued stocks from firm-B back, and she profit from this difference enormously.

Hacking the free price system

Every innovation, no matter how diminutive or how ineffectual, influences the free price system. If one invention enters the market, the amount of other products will probably diminish. This happens because in order to manufacture the new invention, it needs raw materials. Manufacturing the invention increases the demand of raw materials, which will reduce the demand of raw materials to make other products. Because manufacturing an innovation changes the supply and demand for other products composed of the same raw materials, one can profit by noticing this difference.

The method goes something like this. Whenever a firm manufactures a widget greater or less than it used to, it displays changes in the price system. The inventor can profit from these changes from buying and selling futures contracts, or contracts guaranteeing buying or selling a thing at some time in the future.

Suppose an inventor, named Bob, manufactures a widget that no other firm has invented. He can buy futures contracts of some other product that uses the same raw material before he releases his invention and then sell these later at a higher price.

Suppose Bob invented a new type of machine that processes milk faster and cheaper. Thus, Bob predicts that the demand for milk will increase in the future, since the cost of milk will decrease due to cheaper machinery. Conversely, the demand for yogurt and cheese, which made from the same raw material, milk, will decrease; since its prices will rise in response to increased raw milk demand.

Bob can buy yogurt and cheese first and store them at his storage tank, and promise futures contracts and sell them later at a slightly higher price. Bob will then start his own business, hoping that his invention will not spread to his competitors. Bob earns profit. However, his competitors eventually finds out his design of his machine, so he does not earn profits anymore. However, he still has yogurt and cheese stored at his storage tank, and plans to sell them at a higher price for profit.

This demonstrates that in addition to trade secrets, he can also use futures contracts to buy cheese and yogurt at low prices before high demand of milk and sell cheese and yogurt at a higher price when people highly demand milk.

This illustrates that inventors can perform a variety of things to benefit.

Contract monopoly

Bob can also agree with futures contracts to only sell from his own firm at a lower price, before he releases his invention. Then, when he releases his invention, he establishes his own firm but many others still buy from his firm because he agreed with futures contracts forcing others to buy from his firm. Therefore, Bob will profit similar to a state-granted patent monopoly, but enforced by futures contracts before he releases his invention.

Suppose that Bob has made a machine that publishes books at a cheaper cost. Before he releases his design of his machine to his competitors, he promises a futures contract with authors who agree to publish 10 books only from his version of the machine from now on. Bob can release his design of his machine to as many competitors as he wants to, but according to the promise of the futures contract, the authors still has to publish 10 books from his version of the machine, due to the futures contract promises.

We can also apply this kind of strategy to reward entrepreneurs by further exploiting the free price system. Suppose Alice invented a machine that manufactures chairs at a cheaper price. She should promise other firms to bulk-buy her cheaply manufactured price at the future, so she would earn a profit. However, she could also exploit others, such as the lumber industry, since her invention increased wood, to further profit from the free price system.

Trade secrets

Suppose an inventor discovers a new method for making software. He will sell programmers who want to use he method by selling them a trade secret. It agrees that all of his customers will not release his method. However, suppose the inventor has one hundred customers. He, however, cannot track which one released his trade secret, so he do not know which to sue.

He could, however, offer ``guards" to track that his customers, for sure, does not release his method for making software. Yes, the inventor sees it as expensive, but some inventions, he might see it as worth it. For instance, if he invented a method that will increase efficiency by one hundred times, he could license his trade secret to only a few large firms at a high price, and keeping guards to track that his licensees do not release his method.

Advanced innovation incentives

Using advanced technology, the inventor of the trade secret do not need to employ one guard to monitor every licensee. He could, alternatively, mount small wireless video cameras on each licensee's forehead, to see if one licensee released his trade secret. Thus, he does not need to employ any guards to keep track of them, since the video cameras record all of the licensee's actions 24/7. If the inventor finds out that a licensee released his trade secret, he could search the recorded video camera and seek evidence suggesting which licensee spread his trade secret, to sue him.

This seems intrusive to the privacy of the licensees, but the inventor can solve it by agreeing a privacy policy, which he promises to not let others look at the video camera's history unless the trade secret has spread.

Suppose that some innovations cannot possibly preserve as a trade secret, such as a method of combing hair, since consumers will notice that invention.

That would also enforce it by trade secrets, giving video cameras on all of the consumers to not spread.

Also, voluntary cities can set its own trade secret technologies, which can prevent communication to outsiders.


Utilizing short selling and futures contracts as an incentive to invent can gain huge profits. To use these methods, however, imply that the inventor must not release his invention to the market and let others reap the profits first. He must do some market transactions before he releases his idea to the market, in order to profit. Short selling and using future contracts appear similar to exploiting the market from ``inside knowledge," which means that the inventor has ``inside knowledge" of how the market would react to his invention, and then exploiting the stock market for profit.

Most importantly, an inventor can use a combination of stock market, futures contracts, trade secrets and the classical entrepreneurial method to profit big. In addition, some types of ``innovation insurance" deters some risks from the inventor. He can get help from innovation consulting firms which help him decide how to optimally exploit the stock market, futures contracts, trade secrets, and the classical entrepreneurial method.

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