Why IP Laws Should Be Weakened

Economics, Quick Reads
Reading Time: 4 minutes

Intellectual property (IP) laws have gathered a lot of press recently, specifically in relation to the cost of drugs and healthcare, as well as the US-China trade war. There is much debate over their purpose and success. This article will explore what IP laws are, what they aim to achieve, how they might be failing and how they can be improved.

IP rights are a type of property right which involve ideas and inventions. Namely, they entitle the creator of an invention (for example a healthcare company which discovers a certain drug) the rights to be the only seller of that product for a certain number of years. In essence, IP laws are designed to incentivise innovation and invention with the lure of monopoly control over the invention of a specific person/ company, allowing them to take maximum profits from their creation and thus ensuring a strong return on investment exists. In the case of healthcare, drug companies are incentivised to produce new and better drugs since they know that, if they make a crucial new discovery, they will be able to reap the financial benefits of it and recoup the costs of research and development. Some also argue that the existence of intellectual property rights are also justified on grounds of fairness, namely that the innovator ought to be entitled to the proceeds of his innovation.

IP protection, on the surface, seems like a fantastic idea which encourages innovation and upholds private property – a central cog of free markets. I would not advocate a complete removal of IP protection since, as outlined above, they serve an important role in promoting research and development. However, when we think a little more carefully about the repercussions of IP protection, we realise that it might not be quite as brilliant as initially presented. By guaranteeing the ‘discoverer’ of intellectual property (for example a drug) the sole rights to selling it, IP protection implies that just one person/ company is responsible for the discovering. This, though, is almost never true. Discoveries come from decades of research from many different sources, including university academics and government-funded institutions; yet it is only one person or company who ends up with the IP rights. Similarly, if one researcher within a drug company discovers a new drug, while the researcher may gain a small bonus, the company he/she is working for – which will have assumed the IP rights for the new drug – will take the lion’s share of the proceeds from the drug sales. While the researcher’s contract will have included that the company would end up with all the IP rights, it nevertheless means that the idea of IP being justified on the grounds of ensuring innovators get what they deserve is not actually what happens.

The idea of IP protection incentivising R&D seems to have more merit than the idea that IP laws ensure that the inventor has the rights to his invention. It is indeed true that companies would be unlikely to invest in R&D without any IP protection, as they know that there would be low returns to their investment. However, currently patent rights last for something like a new drug, for 14 years. Could this length of time be shortened and the incentives for R&D retained? For example, if the patent rights were reduced to 10 years, much of the incentivisation would be retained, but society would no longer suffer from the 4 years of monopolistic rent-seeking that would otherwise have occurred (rent-seeking is where a company with a monopoly over a product charges more than they would in a competitive market).

Furthermore, there is an argument for suggesting that strong IP laws may reduce the level of innovation. This comes from the fact that, as mentioned earlier, research and discoveries build on the research and discoveries of others. When strong IP laws are in place, it is difficult for companies to access and build on the research of other companies (this is why government-funded research is so important) leading to a lower rate of discovery.

In addition to this, the strong IP and patent laws may also lead to bad incentives, ending up not incentivising R&D. This comes from the fact that companies are able to renew patents on products (i.e. keeping the IP on a product past 14 years), provided they demonstrate they have improved that product sufficiently. Thus, drug companies are incentivised not to discover new drugs, but instead to change existing drugs just enough to ensure their patent is renewed. Alternatively, companies take out multiple patents on the same drug, by patenting each unique individual aspect of it. For example, the drug Humira – which treats rheumatoid arthritis – has more than 100 patents around it, staggered over time. These are not actions we want to be incentivising – they both damage the consumer, by allowing rent-seeking to occur, and lead to lower rates of actual, ground-breaking discovery, since companies invest in government lobbying and protecting their IP rights, rather than producing novel drugs. One shocking fact is that, between 1998 and 2005, pharmaceutical companies spent $900 million on lobbying in congress, and spent $182 million on it in 2006 alone.

As a result, I would advocate for a weakening of IP laws in a few key areas, such as drug manufacturing and technological innovation. I do not doubt their potential benefits, but I also recognise their drawbacks and that improvements could be made. As a result, I would propose reducing the length of time a patent lasts, making it more difficult for ‘slightly-improved-drugs’ to be renewed and, finally, allowing companies and government-run institutions easier access to each other’s research. A change in IP laws, as outlined above, would not only recognise that discoveries do not belong to just one person, but also potentially make a more economically-efficient society, by incentivising actual innovation, and promoting competition.

Leave a Reply