Patents: Lateral vs Vertical Innovation

One of the strongest arguments used by the Intellectual Property(IP) supporters is that patents promote innovation, and the strong counterargument by the IP opponents is, that patents stifle innovation, and that once patents are removed we will have more innovation, considering the fees which will not be spent on securing patents and hiring patent attorneys. The reason why I used the term ‘strong’ and ‘strongest’ because both the sides acknowledge that there is some weight on the argument of the other side. The question is, overall do patents promote innovation or will removal of patents promote innovation? To analyze the arguments, we need to perform small though experiments.

Society with very strict IP Rights

Against Intellectual Monopoly - $27

To exaggerate the observation, we need to consider a radically different society. Lets presume a society(say on the planet Mars) where every intellectual property is tangible like real property. For example, if you discovered a specific way to cover your body with a cloth(say you made a Shirt) then the only way I can also wrap myself with a cloth in that way is by taking your permission, otherwise it will be stealing, because then you will not be able to wear shirt the same way. If I discover a new term say ‘liberty’ then anyone who wants to use that term, must take my permission(usually granted for a specific fee) or else you will devoid me from using that term and it will be just like the theft of real property.

In this society every time a couple gets married, in addition to gifting them various physical products like a coffee maker or a toaster, people gift licenses to various recipes, as making a recipe without the prior permission of its creator will be theft. To write a book on the various topics, the publisher has to clear every possible term for its license. If you want to use the term ‘liberty’ and its definition is ‘the condition in which an individual has a right to act according to his or her own will’, then either need to get license from the creator of the term liberty(which would be the current descendents of John Stuart Mill), or you need to coin your own term which should be different from ‘liberty’ but convey the same meaning, like ‘liberty22’ which defines as ‘the condition in which an individual has a right to act according to his will without infringing on the rights of less than 5 million people’. Now presuming that your lawyers are able to defend this term as different from ‘liberty’, it basically conveys the same intention to the readers as the term ‘liberty’.

You will realize that in this society, there are a million different food recipes, a million different languages, billions of terms and words in languages, millions of different clothing items. As you can see this society would have much more ‘innovation’ than our current society, after all we only have a few 100 recipes in any cuisine, only a few hundred thousand words in any language, and if someone coins a term, it is used for so many things.

The truth is, that we can all see that although this society will have a very wide variety of innovation, it will suffer from two things, first the poor people will be devoid of so many things, the poor people will not be able to build efficient houses, because they cannot buy the licenses, they cannot eat variety of dishes, the poor kids will have to arrange for a lot more money because the education will be so costly. Secondly, although this society will have a lot more ‘variety’, we can see that it will lack the advanced technologies. For example, there will be 200 different types of semiconductor devices, but instead of having a million devices created out of one semiconductor device(like transistors) we will have only a few hundred different types of electronic devices. We will have hundreds of different words for describing ‘gravity’, but very little number of people who actually understand advanced concepts because they are using their brain cells to store 100 different terms for gravity, rather than 100 advanced usages of gravitational force.

Society with no IP Rights

100 million Creative Commons photos on Flickr

Lets presume a society with no concepts of intellectual property, in fact there are no property rights at all as everything is intangible like information. If you have a loaf of bread then to give it to me all you need to do is show it to me, and I will close my eyes, wish it and I will get my own loaf of bread. If I like your lawn mower then all I have to do is close my eyes, wish it and I will be able to conjure it to me.

Its obvious that there will be a loss less starvation in this society, all we will have to do is conjure food for the poor people and they will be able to eat. If you need an computer or a television you just have to wish for it and you will get it. The only thing scarce in this society will be the time, that is you just have to do the work of choose what you wanna wish for and then you move on to enjoying that product.

What will happen to the innovation in this society? Its obvious that there is no incentive to do so many variety of things. There are no factories to mass produce a product, this means that the only job people do is either consuming the products, or invent new products out of their own need to do something different. The houses will all look the same, except for the rich people who would still wanna spend some money to have their houses look different(which will be immediately copied all over by poor people if they are given an access to their houses).Every product in the society will basically be the same except they will be personalized by each individual according to their own taste.

The development of technology in this society will be quite straightforward. There will be rarely two kinds of alternate technologies, for example if a cell phone is developed then all the other cell phones will be only personalized forms of this cell phone, until a stage is reached when personalization of personalization pass through hands of a geek who tweaks it to an iPhone, and so on. The biggest force behind the innovation in such a society will be a human need for variation. People want variations in their lives. Every technology in this society will be achieved through humans who voluntarily want to give their labor into developing something new, when they know they are not acquiring monopoly on the usage of that technology or property. An iPhone-like phone in this world may or may not be developed, we don’t know. But we do know that if it is developed no single company has to spend millions of dollars in developing it. The question ‘who will spend millions of dollars to develop a product without patents’ will never arise. There are no products in this world, there are no corporations producing these products, because they don’t really have to.

Vertical vs Lateral Innovation

There is clearly some reduction of innovation and some increase in innovation in both a society with patents and without patents, but none of sides(the pro– and anti– IP people) seem to realize this. There are no clear definition of what kinds of innovations are promoted by patents and what kinds of innovations are not. So lets define these two innovations, Vertical Innovation, and Lateral Innovation.

Vertical Innovation is when a new product is innovated based on merely a small amount of added new technology, for example adding the facility of watching videos on an MP3 player, or adding a new metal on an alloy best suited for making railway tracks which now reduces its ability to expand and contract in heat and in cold, or creating an AIDS vaccination by using the results, effects, and formulas of 10 different immunity vaccines.

Lateral Innovation is when a new product is developed which provides same functionality as a previously existing product but it tries to achieve that in a different manner. For example a new motorcycle is developed which uses fluids load-balancing(just making it up) for more stability because a motorcycle is already developed and it is patented, or a new type of Fan is developed which is embedded in a box because the regular fan is already developed and patented.

Patents only promote Lateral Innovation, and allow very slow vertical innovation, on the other hand a non-patent society promotes vertical innovation and allows very slow lateral innovation. Is either of them better than the other? Well the truth is, although you could make an equally strong case for the need of lateral innovation(or even a mixture of both by promoting a limited patent system), you cannot argue about the fact that a non-IP rights society allows its products to be reached by more and more people. If lateral vs vertical innovation was the only point of debate then there is literally no reason to choose one over the other, but the truth is, we live in the world of scarcity. We have property rights in tangible things only because if I create a loaf of bread, only one person can consume it, so its necessary to exclude others from consuming that loaf and give its ownership to its creator, but if that loaf of bread could be copied and distributed among millions of people and thereby satisfying the hunger of all those men, then forcing exclusion of other individuals from consuming it is just inhumane.

Its true that if you put your labor into an idea then you should be allowed to consume the fruits of it, but the only reason why you put that much labor into that idea(or innovation or discovery) is because you were excluded from using someone else’s labor. Intellectual Property is a classic solution created by the problem itself, just like everything else in the world done by the government.

19 comments for “Patents: Lateral vs Vertical Innovation

  1. August 17, 2009 at 8:19 pm

    The distinction between vertical and horizontal innovation is interesting, but I believe ultimately incorrect. Sorina B. Khan’s book the Democratization of Invention shows that U.S. profited both by small advances and large advances in technology. Often seemingly small advances make the real difference in whether an invention is applicable to only a small market or is a market changing invention. See “Did Edison Invent the Light Bulb” http://hallingblog.com/2009/07/20/did-edison-invent-the-light-bulb/.

    You are clearly correct that in theory intellectual property laws can be so strong as to inhibit innovation. Ms. Khan’s book seems to argue that copyrights in Europe in the 19th century fit this case. However, there has never been a country whose patent laws have been so strong as to inhibit innovation. The clear empirical evidence shows that those countries with the strongest patent laws have been the most innovative and had the greatest diffusion of technology. While those countries with weak or non-existent patent laws have had almost no innovation and very limited technology diffusion. For more information see http://hallingblog.com/2009/05/18/intellectual-property-socialism-part-iv-uspto-takes-aim-at-innventors/
    .-= Dale B. Halling´s last blog ..Obama – Change Pharmaceutical Patent Term to 7 Years =-.

  2. August 18, 2009 at 1:18 am

    Actually, your example of USA and USSR is not supported by actual experience. Countries that rely on copying technology usually have low rates of technology diffusion. Clearly, it is hard to completely separate out since countries with strong property rights usually have strong patent rights also. However, at the beginning of the 19th century the US developed an effective patent system and England relied on an archaic system left over from the right of Royalty to hand out privileges. Since the US and England were otherwise very similar, it is a good test for the effectiveness of a patent system to encourage innovation. The clear evidence was that the US was more innovative than England during this time.
    .-= Dale B. Halling´s last blog ..Obama – Change Pharmaceutical Patent Term to 7 Years =-.

  3. August 18, 2009 at 1:34 am

    I was not being literal with USA and USSR either – my point is both the creation and diffusion of technology is associated with countries that have strong patent laws.
    .-= Dale B. Halling´s last blog ..Obama – Change Pharmaceutical Patent Term to 7 Years =-.

  4. renegade_division
    August 18, 2009 at 2:34 am

    Ok I understand, but my point is there are no two countries with same amount of property rights, but opposite IP rights, so looking at empirical evidence is not possible. And if there WERE two countries with same property rights, but opposite IP rights, they will copy each other so it will be impossible to determine the innovation in the non-IP country.

    I mean what is your criteria to determine the innovation in a non-IP country? The patent office?? The patents themselves?

    Take a look at this way, if you have to compare the innovation between the Open Source and the proprietary software world it will not be possible to do so because they both copy each other all the time. You may wanna believe that Microsoft is more innovative than the Open Source counterparts, but the truth is, it is not possible to determine who copies whom(in terms of innovation). In fact it may be possible to compare OSes but try that in a field which sprang up only recently, like Blogging softwares.

    Its easy to see patents issued, but its not easy to see what patents weren’t issued in a country with no IP rights.

    My point isn’t that non-patent countries have more innovation than patent countries, but its not possible to determine who has more. So we have to rely ONLY on Apriori reasoning regarding innovation.

    If my example is not clear then I would like to exaggerate the example.

    *).The countries with business license requirements see more businesses than countries with no business license requirements.

    *).The cities with barber license requirements see more barbers than cities with no barber license requirements(not easy to measure the barbers in a city with no license requirements)

    *).The more people who pray survive the disaster than people who don’t pray(the people who prayed and didn’t survive aren’t there to tell the story).

    *).FDA saves more people by stopping bad drugs than by not stopping the bad drugs(because there is no way to measure the people it killed by stopping good technologies)

  5. August 18, 2009 at 3:50 am

    Yes, I understand the difference between coincidence, correlation, and causation. I think the 19th century example of the US and England eliminates a number of the variables you are concerned about.

    Here is what we know:
    1) Intellectual property rights are consistent with the Natural Law theory of property rights.
    2) People with real property rights make their assets more productive than without property rights – Tragedy of the Commons.
    3) Inventors are motivated by economic returns like all other human beings – Note you may be able to find an individual exception, but in aggregate the laws of economics apply to inventors just like all other people.
    4) From the above it is clear that patents encourage people to invent and a lack of patent protection inhibits innovation. All the macroeconomic evidence supports this conclusion.

    Here is what we do not know:
    1) What is the optimum term for patents.
    2) Whether patents are more effective at encouraging certain types of inventing (pharmaceuticals vs. software or horizontal vs. vertical inventing)
    .-= Dale B. Halling´s last blog ..Obama – Change Pharmaceutical Patent Term to 7 Years =-.

  6. August 19, 2009 at 8:14 pm

    1) Patent are not a monopoly – artificial or otherwise. Patents are property rights. A patent gives the holder the right to exclude others from making, using or selling the invention. 35 USC 154. It does not give the holder the right to make, use or sell their invention. A monopoly is an exclusive right to a market, such as an electric utility company. An electric utility company has the exclusive right to sell electricity in a certain territory. Since a patent does not even given the holder the right to sell their invention, let alone an exclusive right to a market, it is clearly not a monopoly.
    When a person describes a patent as a monopoly to be consistent they should also state that they have a monopoly over their car or over their house. In fact, they have more rights in their car and house than a patent gives the inventor over their invention, since you have a right to use and sell your car or house. A patent does not give these rights to an inventor over his invention. All invention are built upon existing elements (conservation of matter) and if the elements that the invention uses are patented, then the inventor will not have the right to sell their invention without a license.
    Some economists argue that a patent is designed to give the holder monopoly power. Those economists who are consistent also state that all property rights give some monopoly power. The property rights are monopolies thesis shows how confused economic thought is on this subject. The only logically consistent definition of a monopoly is an exclusive right to a market.
    People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.

    2) There are two parts to the tragedy of the commons 1) over utilization, 2) under investment. Inventions are subject to over utilization but the are clear subject to under investment. Property rights are useful for avoid under investment and the only solution consistent with a free market.

    3) If I understand you point, you are suggesting there is no need for all this inventing. The advantage of innovation is that it is the only way to increase real per capita income. See – http://hallingblog.com/2009/07/08/is-innovation-the-key-to-growing-the-u-s-economy/

    4) Some Libertarians are pushing this idea that patents are not consistent with a Free Market. This is just false. The usual argument is that property rights are based on scarcity (Scarcity theory of property rights –see Stephen Kinsella, Against Intellectual Property). This argument is wrong both historically and factually. See – http://hallingblog.com/2009/06/22/scarcity-–-does-it-prove-intellectual-property-is-unjustified/

    5) As a patent attorney who has dealt with numerous inventions, my experience does not support the vertical vs. horizontal invention distinction. This does not mean it is not true.
    .-= Dale B. Halling´s last blog ..Patent Quality Myth =-.

  7. SAL-e
    August 25, 2009 at 8:49 am

    Known problem for science of motivation. Good presentation from Dan Pink @ TED conference:
    http://www.ted.com/talks/dan_pink_on_motivation.html
    When we are going to acknowledge well know scientific fact that incentives for innovation do not work. Not only that, incentives are reducing innovation.

  8. August 25, 2009 at 7:46 pm

    There is no empricial evidence to support the position your “well known” position that incentives for innovation do not work. It can’t be a scientific fact since there is ample evidence to the contrary. For instance, every country that has property rights, which are an incentive to innovate, always out performs countries with no or weak property rights.
    Countries with strong intellectual property rights are the most innovative countries in the world. Those countries with weak IP rights exhibit little or no innovations.
    .-= Dale B. Halling´s last blog ..Innovation – Wake-Up Call =-.

  9. renegade_division
    August 26, 2009 at 12:51 am

    There is a strong empirical evidence suggesting that people with a lighter skin tone have more innovation than people with darker skin tone.
    There is a strong empirical evidence suggesting that countries with lighter skin tone are more prosperous than countries with darker skin tone.

    So what does that mean? It means nothing, empirical evidences are bullshit and highly inaccurate. The reason why we cannot measure the above given hypothesis(it could be true or it could not be true, who knows I could be smarter had I had lighter skin color), because we cannot hold other things fixed.

    There is no way of knowing whether the more prosperity(or more innovation) in the countries with lighter skin color was caused by property rights, IP rights, Skin color, Racial mixture, Age of the democracy etc etc through empirical evidences because to find out whether IP rights caused that innovation or Property rights caused that innovation you will have to fix everything else, take two countries with everything else the same except for property rights(or the factor you want to observe) and then measure the innovation out of it over a period of 50 years.

    If we aren’t lucky enough to have two countries who are similar in each and every aspect except for IP rights for the last 50(or 30) years then no we cannot say whether its the IP rights which caused the innovation or not. So stop using empirical evidences and stop asking for empirical evidences. If you cannot use apriori logic, then I am sorry I consider you intellectually dishonest.

  10. August 26, 2009 at 1:39 am

    Empirical evidence of the contrary position can prove that a hypothesis is not true. Your assertion was “incentives do no encourage innovation.” A single instance where incentives do encourage innovation is enough to prove your thesis incorrect. You attempt to ignore the facts by creating a straw man argument about skin color. Since you assert that your proposition is a scientific fact, the burden of proof is on you. I have pointed out not just one case but a clear trend that does not support your point of view. You have not provided an answer for this anomaly.
    .-= Dale B. Halling´s last blog ..Patents – Good News =-.

  11. August 26, 2009 at 2:48 am

    I apologize if I mischaracterized your arguments. That was not my intention.
    .-= Dale B. Halling´s last blog ..Patents – Good News =-.

  12. renegade_division
    August 18, 2009 at 12:19 am

    See the reason why I coined the terms ‘horizontal’ and ‘vertical’ innovations because I could see the difference between the kinds of innovation(and the ‘kind’ or ‘type’ does matter here) being squashed and promoted by patents. When you talk about the strong IP laws which could inhibit innovation, you should realize that it will actually promote a different kind of innovation, currently after 20 years every patented technology becomes non-patented technology, so you can say that in long run after patents expire technologies start to be developed vertically, but they are slowed down greatly. For a theoretical discussion I talked about a society where IP laws are never-expiring. No country in the world grants non-expiring patents, so the argument is untrue that patents have promoted the vertical innovation, it is the ‘expiry’ of patents which promote vertical innovation.

    The clear empirical evidence shows that those countries with the strongest patent laws have been the most innovative and had the greatest diffusion of technology.

    Innovation(horizontal or vertical) also requires capital to back it up. The countries with strong patent laws are also the ones with stronger property rights. Can you imagine a country where there are weak property rights, but government enforces strong IP rights? There is no innovation in these countries because people are just busy in providing access to the people for older technologies. Also there is no country who is rich and can get away by not honoring patents, WTO and US will screw them. India is constantly pressured by the US to have stringer IP enforcement.

    Another MAJOR problem with seeking empirical evidence for what you are trying to demonstrate is ‘stronger patent enforcements leads to more innovation’, now imagine two major countries in the world which are equally rich, like USA Ruritania and USSR Urbantania. USA Ruritania has strong patent enforcement, USSR Urbantania ideologically does not believe in patents. Since we live in a globalized world, you will see that you cannot identify who has more innovation merely by looking at the technologies in the country, because USSR Urbantanian corporations simply copies the technology from USA Ruritania and Ruritanian companies copy the vertical improvements from USSR Urbantania and patent them.
    They both will have same technologies. So then to empirically determine which country has more technology you will have to see which country created more technologies. Unfortunately for USA Ruritania its easy, you look at the patent office, and for USSR Urbantania there is no way.

    Last problem with empirical evidences is, they just look at what’s seen but not what’s unseen. Everybody can see a filed patent. What people cannot see is the number of times a company stops going in a direction because they realize there is a patent existing for that technology, and they cannot get a license of it, or the extra price which is attached with each product due to patents.
    Unless you show me the other side we are not having a fair comparison.

  13. renegade_division
    August 18, 2009 at 1:20 am

    I am sorry I should have used different country names like ‘Ruritania’ and ‘Urbantania’. Just take them as imaginary countries.

  14. renegade_division
    August 19, 2009 at 1:56 pm

    1) Intellectual Property rights are not consistent with the Natural Law theory because the Natural law theory isn’t about creating artificial monopoly on anything. If you produce milk, do you have a natural right to be the only distributor of milk in that area? I mean you are putting your labor into producing the milk, and without such an artificial monopolistic right you will lose a lot of money and will not get a fair value of your labor. If your natural laws justify intellectual property rights then they also justify any kind of artificial monopoly in any tangible property.
    The only reason property rights(or the right to exclude others from using my property) exists under natural law theory because if someone else uses it then I lose the pleasure of my labor.
    To understand Intellectual Property rights you will first have to define the term ‘enjoyment of your labor’ as the right to be the only individual who could sell your book or your product. Once you define the enjoyment of the labor, then you can say that by not following IP rights, the enjoyment of your labor is prevented.

    2) People with real property rights over utilize a common property. If we were living in the society I above described as ‘society with no tangible commodities’, how can a House be over utilized when it can be infinitely copied over. How can an idea be damaged if it is used by everybody in the world. I am sorry but this is the most invalid point you made till now. There is no merit to ‘tragedy of the commons’ on intellectual property rights.

    3) I made it clear in my article that without patents, there will not be any need to put a lot of effort on making something radically different and new. Yes I understand that if you given people incentives they will work more and harder. But if you are looking at the utilitarian perspective(as opposed to the utilitarian perspective) then why forget the part where more people will be able to achieve the benefit of a technology without patents, than to just look at more innovation.
    I mean if I just presume that there will be more innovation with patents, what would you rather have, 20 different kinds of dishes to 2000 people, or 2 different kind of dishes to 20,000 people?

    4) Look I am not saying patents do not encourage innovation, but my point is that they encourage a specific kind of innovation(Horizontal Innovation) and they discourage a specific kind of innovation(Vertical innovation), and yes I understand you were trying to give me empirical example that America saw both growth in horizontal and vertical innovation, but apriori logic wise, America would have seen a lot more vertical innovation had there been no patents.

    Here is what we do not know:
    1) What is the optimum term for patents.
    2) Whether patents are more effective at encouraging certain types of inventing (pharmaceuticals vs. software or horizontal vs. vertical inventing)

    1) We will never get to know what’s an optimum term for patents because you cannot get it enforced in Free Market without a government. It will always be some arbitrary number which will be determined by an econometrician’s mathematical model.
    2) About Pharmaceutical innovation, then I admit that I don’t know much about how companies operate, or how much do they suffer because of patents. But there are many ways by which a radically new drug may be used extensively by a company and that is to only give the medicine dosages in a clinic(or basically contractually implement it, but that’s not IP rights).

  15. renegade_division
    August 26, 2009 at 2:18 am

    Your assertion was “incentives do no encourage innovation.”

    You are wrong dude this is the straw man’s argument you set up. In my article above I ensured that despite my anti-IP position both the sides of innovations(which I categorize as Horizontal and Vertical) should look equal. You are attacking my point as I believe incentives do not encourage innovation but what I am trying to do where is to define innovation(a definition you refuse to accept). You are consistently talking about innovations putting me on anti-incentive side and yourself on pro-incentive side, but where do you find me accepting your definition of innovation.

    The whole point of article was to define innovation. The only positive point I put for anti-patent viewpoint was that the technology will be more accessible to people under an anti-patent regime, other than that both patent and anti-patent societies will give growth to their own kinds of innovations. So the points you can actually make here relevant to this article is, either you believe that there is no such thing as horizontal, and/or vertical innovation and under a regime without IP rights there will not be any so-called vertical innovation, or you believe that the accessibility is not an issue and society will not have less accessibility to technology(or more in a patent-less society).

    Rest of all your arguments are generic pro-IP arguments which have nothing to do with this article.

    Coming to the issue of the empirical vs logical theories, then my point with the skin color argument (and don’t feel scared that you might end up saying something you might regret) was that lets say that on a bird’s eye view its obvious that countries with lighter skin color have more innovation than countries with darker skin color (consider US, UK, European countries which have historically more innovation than the Asian, Latin American and African countries), I am not making a scientific argument that this is the theory, but I am merely pointing it out that your causation relationship is heavily flawed considering there are many attributes which are common among ‘countries having more innovation’.

    You could consider Christianity too if you find skin color thing a bit weird. Most of the countries having more innovation has predominantly Christian, does that mean that following Christ makes you more creative? My point isn’t pushing the argument that skin color or religion creates more innovation (considering I am neither white nor Christian) but to stress on the fact that your argument about seeking empirical evidence to demonstrate stricter IP results in more innovation is deeply flawed.

    The reason why none of the other commonly observed characteristics (Skin color, religion, etc) cannot be used to determine the innovation of a society because logically speaking they are not related to innovation this is why I am sticking to logical proof. My whole point is that empirically speaking I can never disprove your point because we don’t have a country which does not follow strong IP rights but follows strong Private property rights. Just like you cannot disprove my (fake) point about lighter skin color resulting in more innovation. The absence of proof is not a proof of absence.

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