U.S. Patent System And Bitcoin Deflation

The Price of Yesterday’s Innovation: Applying Insights From Jeff Booth’s “The Price of Tomorrow” To The U.S. Patent System

*Special thanks to Jeff Booth for discussing these ideas with the author.

In his 2020 book, “The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future,” Jeff Booth describes two opposing forces at the core of our economy: fiat monetary debasement (i.e., money printing) and technological advancement. Monetary debasement is inflationary, as prices rise when more dollars, euros, etc., chase after the same number of goods and services. Technological advancement, by contrast, is deflationary, as over time technological breakthroughs allow for goods and services to be produced and distributed at higher volume and lower cost. The effects of these opposing forces on price levels somewhat cancel each other out; an increased supply of currency is matched to some degree with an increased supply of goods and services available. Of course, different classes of goods and services are impacted by technological innovation to different degrees, which results in uneven inflation rates across industries. The rate of innovation in the consumer electronics industry, for example, is faster than the rate of monetary debasement, resulting in the net reduction in electronics prices we have all come to enjoy. Technological advancement has had far less impact on housing and higher education, however, which can at least partially explain the rapid inflation in those sectors. As Booth explains, both monetary debasement and technological advancement are exponential in nature. The rate at which governments are printing currency and the rate of technological innovation are increasing every year.

Booth persuasively argued that monetary debasement has deleterious effects on society, whereas innovation-driven deflation has the positive effects of, for example, mitigating wealth inequality and poverty. In essence, monetary debasement serves as a hidden regressive tax on the population, redistributing the wealth generated by productivity gains to the government via seigniorage and to wealthy asset holders via asset inflation. If this monetary debasement were curtailed, Booth argues, the entire population would enjoy the benefits of technological advancement in the form of plummeting prices on goods and services. If you have not yet read Booth’s book, you should.

This article expands on Booth’s work by considering the impact of monetary debasement and technological innovation on the economics of the U.S. patent system. The modern patent framework was established in 1952. Much has changed in the last 70 years, both in terms of U.S. monetary policy and the state of technology. The United States of 1952 was still on a gold standard, preventing the government from debasing the currency as it is doing rampantly today. The rate of technological change was also much slower in 1952 than it is now, as the country was just beginning to enter the computer age and globalization was a far ways off. In view of these massive changes in our economy which are continuing to unfold, it is the author’s opinion that the U.S. patent system is becoming increasingly unable to serve its purpose of promoting innovation and economic growth. A return to sound money (i.e., ending monetary debasement by adopting a bitcoin standard) would resolve at least some of the issues plaguing the current patent system. Alternatively or additionally, reforming the patent laws could bring them into closer alignment with the exponential economy we now live in.

I. Brief Overview Of U.S. Patent Law And Policy Considerations¹

A patent is a legal right granted by the federal government to the creator of a new and useful invention. It allows the inventor to prevent others from practicing — that is, making, using, selling, importing or offering for sale — the invention during a defined period of time following the patent’s grant. Every patent is published, providing the public not only with notice of the inventor’s exclusionary rights, but also with a description of what the invention is and how to make and use it.

The purpose of the patent system is twofold. First, it provides innovators with an incentive to expend resources on research, development and marketing that could otherwise be unprofitable. Without the exclusionary rights provided by a patent, copiers would quickly reverse engineer innovators’ products to create competing products with the same inventive features. By skipping the resource-intensive process of developing the invention, and riding on the coattails of the innovators’ early efforts to introduce consumers to the technology, copiers would often be able to offer the invention at a lower price than the innovator and take significant market share. Patents prevent this scenario by providing innovators with an exclusive right to use an invention during a patent’s term. Any copier during this time is liable to be sued for patent infringement.

The second purpose of the patent system is to incentivize public disclosure of new innovations rather than secrecy. In many instances, an invention cannot readily be reverse engineered by competitors, and so the above-described concern regarding copycats is not applicable. For example, an inventive process of manufacturing a product might not be discernible by examining the product itself. Inventors of such innovations have the option of maintaining their competitive advantage merely by keeping their technology secret (what is known as a “trade secret”), but this is viewed as less socially desirable than patenting because the public is not apprised of the latest technological developments. The patent system incentivizes creators of even inventions that cannot be reverse engineered to disclose their inventions, facilitating further incremental improvements on the technology by others in the field.

Although a patent may prevent competitors from using or commercializing a particular product, it is important to recognize that patents relate to technologies rather than specific products. A single product might contain many patented technologies and thus be subject to the exclusionary rights of many different patentees. Consider, for example, a modern car. How many patented technologies does it contain? There are patents pertaining to different aspects of the battery, the computer systems, the heating and cooling systems, the external camera system, the composition of the tires, the engine or electric motors, etc. A car manufacturer must own or license the rights to each of the patents for the technologies it uses, or risk being dragged through the courts in patent infringement lawsuits. Simply owning a patent that covers a particular product does not confer a legal right to make, use or sell that product; it only confers a legal right to prevent others from doing so without permission.

Because patents relate to technologies, and because technologies are incremental in nature, a poorly designed patent system can actually impede innovation rather than augment it. If the patent term is too long, for example, pioneers and early innovators in a technological field can exert disproportionate control over (and extract undue profits from) later innovators, thereby discouraging later innovation. Let’s continue with the car hypothetical to illuminate this point. Imagine that Inventor A has a patent on a generic wheel. Inventor B has a patent on a wheel that contains a rubber surface. And Inventor C has a patent on a wheel containing an inflated rubber tire. An automaker wants to introduce a new line of wheels with inflated rubber tires that have reinforced sidewalls and treads. Even though none of Inventors A, B and C contemplated tires with reinforced sidewalls or treads, the automaker’s new wheels would nevertheless practice each of their patents. The automaker would, therefore, need to negotiate a license with each of the prior inventors, and any one of the inventors could block the automaker’s new product by refusing to grant such a license. Faced with these headwinds, the automaker could decide not to develop the new wheels at all, instead opting for existing alternatives. If the patents owned by Inventors A and B had expired, however, the automaker would be more willing to develop the new wheels because it would only require a license from Inventor C. It is, therefore, important for patents to expire within a reasonable time frame to prevent them from choking out later innovation. Patents need only last long enough to provide innovators with an adequate incentive to invest in developing new technologies.

The patent system’s capacity to impair innovation is compounded by errors made by the U.S. Patent and Trademark Office (the “Patent Office”) during examination. The Patent Office serves as the gatekeeper for the issuance of new patents, allowing patent applications to issue as patents only when they fulfill several criteria:

1. The alleged invention is novel, that is, it has never been made or described in a publication before.
2. The alleged invention is non-obvious, that is, it is more than a routine modification of something that was made or described before.
3. The patent describes the alleged invention in detail and further describes how to make and use it.
4. The patent’s claims, that is, the scope of the exclusionary rights conferred by the patent, are sufficiently narrow such that they do not encompass subject matter that was already known or that the patent does not adequately disclose.
5. The patent’s claims are unambiguous such that the public has proper notice of what falls within the patent’s exclusionary rights and what does not.

In short, the Patent Office attempts to only allow a patent to be issued when it describes an actual invention and is narrowly and clearly tailored to that invention. Unfortunately, making the correct determination regarding the above criteria is a…