Can We Innovate Out of this Recession?

God only knows how many words have been typed to identify the cause of this recession. I believe that by the time we get to the end and can look back, we will see that this was a depression. In 1929, property values fell more than 30%, but in a longer span of time than we have seen between 2006-2009. If that is a measure of a depression, then we were in one.

So how are we going to get ourselves out of this one? Are we going to go the way of painful cuts in social services and civil services like police, fire and education? Austerity has been tried, to no avail.

Before the last midterm elections, President Obama suggested that the spirit of American innovation can lift us out of this recession. America has had a very long history of innovation leading the way for this country. But it can only do so as long as the powers that be are willing to let it. Unfortunately, there is very little room for innovation without risk of incumbents blocking or shelving the new ideas that could be implemented to lift our economy.

There is a lot of talk about the change in tax policy over the last 30 years. It is clear that tax policy has favored those who have money over those that don't. Tax policy has given rise to enormous efforts to send manufacturing offshore. As a result, very little in the way of new manufacturing has been brought here. Andy Grove, a former Intel executive, has pointed out that as we send our manufacturing offshore, we're giving away our ability to innovate.

But there is a subtle change that hasn't been noticed by the mainstream media: the consolidation of intellectual property into the hands of a few very powerful players. Some of them you've heard of: Apple, Microsoft, Viacom. But there are a few very large players you may not have heard of until today: Intellectual Ventures, MPEG-LA, Acacia.

Of the former group, they make things we'd like to use as consumers. iPads, Windows, and 2 1/2 Men (well, maybe not). Of the latter, they don't make the things you want to buy. They make them more expensive.

How did this happen? Quite a few books have been written on the subject, but in a nutshell, this country has draped itself in intellectual property as a religion that has turned into a boa constrictor for our economy. Over the last 30 years, we have slowly turned the screws to the public domain and the industrial commons by increasing the power of intellectual property laws and making it harder to challenge the validity of patents without going to court. it has become a tragedy of the anti-commons.

A typical patent lawsuit defense can cost anywhere from $3-6 million and that is just a start. This is significant barrier to bringing innovations to market. The high cost of patent litigation has also given rise to patent trolls. Patent trolls make no products so they are immune to counterclaims and public backlash. But they make a lot of money by threatening to sue, and offering settlement terms for an amount lower than the cost of litigation.

As we make intellectual property laws stronger, we increase the cost of downstream innovation and eventually, we find that we're falling behind other countries in terms of innovation. We are simply  so mired in litigation, both at the patent office and in court, that we don't have time to solve the really big problems humans face. This is because patents have perverted the incentives for innovation.

Of course, falling behind other countries is less of a problem if you can foist your intellectual property regime onto other countries. We do this in exchange for access to our markets and to pry open access to the markets in other countries. The US has "free trade" agreements with many other countries that achieve the goal of imposing the US patent regime on the partner countries.

Each of these agreements is guaranteed to protect doctors, lawyers and other professionals while exposing middle class manufacturing workers to direct competition with lower paid foreign workers. But more importantly, they require the other country to use the same intellectual property rules that we use here.

Apple, Intel and a few other manufacturers take great comfort in these agreements. So much so, that they can safely move their manufacturing operations to other countries without worry that their products will be copied unlawfully. That, to me, explains the decline of the American economy.

Despite many attempts at patent reform, Congress has not arrived at a solution to the problem of misplaced incentives. Michele Boldrin and David Levine have suggested the elimination of patents altogether. In a report released by the Federal Reserve Bank, Boldrin and Levine make a powerful case for eliminating patents and the market perversions they induce.

Our intellectual property regime only works for a privileged few. Until our intellectual property regime works for everyone, innovators will have very little power to help our economy. Moreover, intellectual property regimes must respect the public domain, something our current regime fails to do.