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Book Review

Patents, Economics, Policy and Measurement

FM Scherer

ISBN: 978-1-845424-81-7 2005 310 pages Edward Elgar Publishing

Elizabeth Webster
Intellectual Property Research Institute of Australia, University of Melbourne, Melbourne VIC

There are arguably fewer scholars to date in the field of the economics of technological change and intellectual property that have provided the intellectual and philosophical contribution of Professor Scherer. His insights into economic analysis and policy have an enduring clarity and acuity that provide novice and experienced readers alike with thoughtful and well-considered perspectives. Following the time-honoured Marshallian tradition, Scherer interweaves theory with empirical verification, thereby focussing on issues that are not only of central importance to economic well-being, but are rooted in realistic behaviours.

His first set of essays deal primarily with the economic effects of the patent system on the pharmaceutical industry. Pharmaceuticals are the classic market for innovation failure. The costs of a complete investment for the original investor in a new drug are high, while the costs of imitation, and thus potential for free-riding by subsequent producers, are low. Accordingly, investment and creation will be well below the social optimum without public-sector intervention, but once created, policies such as patents impose significant dead-weight losses on society. Scherer discusses conundrums such as how well the (very skewed) structure of patent rewards dovetail with the rewards required to bring forth optimal levels of creative effort, biases under the legal system in favour of large corporations, inducements to create patent fences and the compounding 'snowball effects' of property rights under cumulative research. Importantly, he also presents some proposals for reform comprising more rigorous standards for patent examination, changes to patent life, compulsory licensing and the extension to public provision and awards. Nonetheless, he also questions our ability to fine tune patent policy.

Related to these issues are his essays on the relatively less-analysed realm of technological licensing. Analytically, licensing is interesting since it draws concepts such as fundamental uncertainty together with theories of firm capabilities, the dichotomy between investment and exclusivity, legal protection through inter-firm alliances and the social costs of disallowing multiple research paths. The quandary of allocating fair rewards when effort is complementary (and accordingly when bargaining plays a pivotal role) is also raised. Inventions, for which several separate sub-inventions are necessary but not sufficient, are akin he argues to medieval traffic passing through multiple toll gates.

In this volume, Professor Scherer and colleagues, Professors Harhoff and Vopel also provide significant, confirmatory evidence of the long-held belief that the distribution of patent values is skewed towards a small percentage of very valuable inventions. This is important evidence that underlies many of the analysis about innovation, from the role of uncertainty to the appropriate incentive system for optimal invention. Subsequently, Scherer duly reminds us that expected values are not mathematically possible when the underlying true distribution is asymptotically skewed.

There is however one assumption underpinning some of the papers that, I suspect, may not be sustained with further research. Scherer adheres to the classical view that investment levels are limited by declining marginal returns. However, for investment into invention, this does not have clear intuitive logic. Following Shackle (1942, 1956), it is quite likely that the inherent uncertainty embodied in creation makes ex ante ranking of projects by benefits impossible. Investments in these activities are accordingly more likely to be limited by Kalecki's principle of increasing risk (Kalecki 1939).

All in all, a worthy volume of essays that cannot, and should not, be overlooked by innovation analysts.

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