Quote of the Day: The wrong kind of growth

When I’m talking to students about Austro-classical ideas, they often ask “Why did Keynesianism win out?” Here’s one answer:

Why did the Keynesian faith win out? Economist salesmen like Keynes focused on the future, a perfect formula for the political class to use to drive growth well into the 1990s. This Keynesian message of growth via inflation and debt was also perfectly aligned with the message produced on Wall Street of ever rising earnings growth and stock prices. With the Keynesian revolution, however, also came debt, inflation, and progressively larger and larger financial and economic busts.

“Growth” via inflation and debt.That’s definitely been the wrong kind of growth.

Technology Needs Capital To Produce Economic Growth

Guest post by Frank Shostak

In his article “The Big Meh” Paul Krugman complains that despite all the information technology advances the effect so far has been negligible as far as economic growth is concerned.

Krugman writes “That the whole digital era, spanning more than four decades, is looking like a disappointment. New technologies have yielded great headlines but modest economic results. Why? ... The answer is that I don’t know — but neither does anyone else.”

Indeed if one looks at the US’s real gross domestic product as compared to the potential real gross domestic product [by it’s nature a slippery measurement, but still … ] , the economy does appear to be hovering below potential, with a ratio of 0.977 registered in Q1 this year:  

Contrary to Krugman’s own admission of ignorance on behalf of his profession, however we suggest that economists such as Ludwig von Mises and Murray Rothbard have provided a clear answer to the issue of technology and economic growth.

In a seminal article on 'Capital Supply and American Prosperity,’ [one that every “growth theorist” should read and digest] Mises points out that technology, while important, must always work through the investment of capital in order to generate economic growth. Writing in 1952, he observed:

It is not true that the economic backwardness of [many] countries is to be imputed to technological ignorance on the part of their peoples. Modern technology is by and large no esoteric doctrine. It is taught at many technological universities in this country as well as abroad. It is described in many excellent textbooks and articles of scientific magazines. Hundreds of [non-Americans] are every year graduated from American technological institutes. There are in every part of the earth many experts perfectly conversant with the most recent developments of industrial technique. It is not a lack of the "know how" that prevents foreign countries from fully adopting American methods of manufacturing but the insufficiency of capital available.¹

Most modern theories that emphasise the importance of new ideas and new technologies give the impression that these ideas and technologies have a “life of their own.” Many experts hold that because of the limited amounts of capital and labour, without technological progress, the opportunities for growth will eventually run out.

We Need Funding To Implement New Ideas

Ideas, unlike material inputs, are not themselves “scarce.” Consequently, it is argued, new ideas for more efficient processes and new products can make continuous growth possible.

We suggest that regardless of how many ideas people have, what matters is whether these ideas can be implemented. What always limits the implementation of various new techniques is the availability of funding. While ideas and new techniques can result in a better use of scarce resources, they can however, do very little without the pool of real savings.

So regardless of how clever we are and regardless of various technological ideas, without an adequate pool of funding nothing will emerge. It is through the expansion in the pool of real savings that an increase in the stock of capital goods is possible. And it is the increase in the capital goods per worker that permits economic growth to emerge.

To Get More Funding, We Need Savings

Obviously, new ideas and new technology can be introduced during the production of new capital goods (i.e., new technology) and will be imbedded in the capital goods stock. The crux of the matter however, is that capital goods cannot emerge without a prior increase in the pool of funding or pool of real savings.

Take, for instance, a baker John who produced ten loaves of bread. He consumes two loaves of bread whilst the other two loaves — his real savings — he employs to purchase a new part to improve his oven. With a better oven he can now raise the output of bread to twenty loaves. If he still consumes only two loaves, then with a larger savings (now stands at eighteen loaves) he can enhance further his oven by introducing new parts, which will enable the introduction of new technology. Note that all this is made possible on account of real savings.

We suggest that despite new technologies, a major impediment to economic growth has been the relentless central bank tampering with financial markets.

Since 2008 this tampering was made manifest in the extremely loose monetary policy of the Fed that resulted in the massive monetary expansion of the Fed’s balance sheet and the lowering of interest rates to almost nil.

These policies have been responsible for a severe erosion of the pool of real savings and thus a weakening of the process of capital formation. This in turn has undermined real economic growth notwithstanding new information technology.

For Krugman and his followers savings is bad news — it is seen as less demand — hence one shouldn’t be surprised that Krugman is puzzled as to why new ideas haven’t manifested in a more robust economic growth.

Contrary to Krugman, boosting so-called aggregate demand whilst undermining the capital formation process, and hence the ability to produce goods and services, cannot strengthen economic growth over time. In fact this way of thinking results in the notion that something can be generated out of nothing.

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Dr Frank Shostak is the head of Australian research firm Applied Austrian Economics Ltd, and one of the world leaders in the applied Austrian School of Economics. An adjunct scholar at the Mises Institute in the US, Dr Shostak has been an economist and market strategist for MF Global Australia (previously Ord Minnett) since 1986. During 1974 to 1980 he was head of the econometric department at the Standard Bank in Johannesburg South Africa. During 1981 to 1985 he was head of an economic consulting firm Econometrix in Johannesburg.
This post first appeared  at the Mises Daily. It has been lightly edited.

NOTES:
1. Noah: “This lack of saved capital in these economies comes from a lack of the legal structure of property and property rights, according to the excellent Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando De Soto”: https://mises.org/library/capi...

‘Patent Trolls’ vs. Legal Trolls

The problem today is not that so-called “patent trolls” are able to mooch off valid patents; the real problem, writes guest poster Dale Halling, is that “legal trolls” are able to mooch off today’s poorly defined, sloppily written, wrongly conceived and inconsistently enforced law. Fix that, and patents can be defended properly once again.

There has been a lot of media attention about so-called patent trolls.  I am intimately familiar with these issues, but the characterization is incorrect.  There are Legal Trolls, some of whom specialize in patents, but they prey upon the same problems that infect every part of our legal system and so there is nothing unique regarding patents.  As happens so often, the government creates one problem and then people see the symptom and propose more improper government policies, which causes even more problems.

Legal Trolls Gaming the System

I had a small software start-up that was contacted by a Legal Troll.  The troll had selected our company because our website suggested it was in a somewhat similar space to the patents they were attempting to enforce.  I analysed the claims and it was clear the company was not practicing the patented invention.  When I contacted the troll however they were unwilling to review either the case or the claims.  They did not appear to be interested in the truth.  Our company decided it would rather die litigating than take a license they did not require.  We also worried that taking the license would make the company harder to be acquired later.

Another case that illustrates the point happened before the term “troll“was even invented.  A patent counsel for a large Fortune 500 company received a complaint for patent infringement of over 30 patents.  Under the CAFC rules at the time, the company would have had to spend at least $300,000 on opinions simply to respond to the complaint.  A couple of days later the troll offered to settle for about $100,000, knowing full well that both the costs and time constraints made this a great hold-up game.  The company’s patent counsel was so pissed off about this clear extortion that he refused to give in and found there was a cross-licensing agreement that gave his company the right to use the patents.  Nevertheless, this was an attempt to extort the company for a quick Christmas bonus, and all that happened to the troll on this shakedown was they had to eat crow and suck up some minor legal fees.

These situations arose not because of patent laws that protect the legitimate rights of inventors, but because of our overly burdensome federal litigation system—and because Rule 11 sanctions are almost never enforced against legal trolls.  So the reality is that these Legal Trolls have been using both the complexity of the law and the absurdly lenient standard for pleading to extort money from companies since at least the 1970s.  These Legal Trolls use for their purpose medical malpractice law, product liability law, securities laws and virtually every other area of poorly-written law on the books.

In the case of the medical malpractice lawsuits relied on by trolls, 90% of those that go to trial fail—if those being sued ever take it that far. Even at this failure rate, with low costs and enough targets, the odds work in their favour.  In a rational case you would expect about a 50% failure rate, otherwise it should be in the interest of the parties to settle.

Here for example is an article, describing the latest holdup "innovation" by securities plaintiff attorneys: holding up listed companies’ annual meetings with fatuous claims of omitted information and mishandled proxies.

But, the biggest Legal Troll of them all, however, is the government—who uses environmental laws to extort money from companies, OHSA rules to extort money from employers, IRS procedures and the unreadable tax codes to extort money from producers … and many others.

America’s Environmental Protection Agency (EPA) regularly demands people comply with their arbitrary ruling or face bankrupting daily fines.  One example of this, Sackett v. EPA, eventually made it to the Supreme Court.  The EPA has not only given itself the ability to assess this fines separate from a court or a trail, but they have argued successfully that they do not need to get a warrant to investigate a person.  This case is hardly unique.  In fact EPA administrator Al Armendariz admitted the EPA purposely terrorises companies to force compliance among subsequent targets.  He compared it to the Romans, who, when they conquered a village they would crucify five people arbitrarily to ensure compliance from all.

The Securities and Exchange Commission refusal to define the crime of “insider trading” is the perfect example of ill-defined law.  Accusing people of “insider trading” has been the favourite political stepping stone for attorney generals out of New York.  See for examples Rudolf Giuliani and Elliot Spitzer.  How can you be charged with a crime the government won’t define?  How do you know if you violated the law?  How can you even have mens rea—an intent to commit a crime, when you don’t even know for sure what the “crime” is? 

The securities laws are really just politics disguised as law—and on this, see also anti-trust laws, described best in the title of Harold Fleming’s Ten Thousand Commandments: A Story of the Antitrust Laws.

Fixing the Problem

Clearly, we have a problem with legal trolls not with patents.  So how do we fix the problem?  (I will ignore how to fix the abuses of our government—a much bigger problem than this one).  First,we need to clearly define what we mean by Legal Troll.  I would define a Legal Troll as any group that uses the complexity of the legal system to make a profit when they know their case is dubious.  Based on this definition there are two main components:

1. the cost and complexity of the legal system, and
2. baseless lawsuits.

In an attempt to promote justice our legal system reduced the requirements for pleadings, and provided a wide-open ‘discovery’ process.  These are the two main reasons why lawsuits are so expensive.

The requirement for a good faith investigation of the facts before filing a complaint should clearly be made stricter;   it is utopian thinking however to assume that judges are ever going to enforce this.  Making the Rule 11 type sanctions a private right and award, instead of judge-applied, would be a solution here—balancing the risks of filing frivolous lawsuits.  In addition we might want to consider a loser-pays type of rule.

The discovery process itself should also be time limited and page limited.  Discovery should not be used as a fishing expedition. 

Another problem is that we have an overworked Federal Judiciary—in part because we do not have enough federal judges, but mainly because we have had an ‘over-productive’ legislature federalising too many crimes and regulations. 

And on the patent level itself, we really should have judges who have technical backgrounds and who have themselves passed the patent bar. Something too often recognised in the breach than in the observance.

The truth is we do not have Patent Trolls, we have Legal Trolls.  And the biggest Legal Trolls of all, both as causal agents and practitioners, are governments.

Dale Halling is a rarity among bloggers. In addition to his law degree, he hold a BS in Electrical Engineering and an MS in Physics. He is an attorney specialising in intellectual property, and the author of the book “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation,” and co-author of the Hank Rangar novels ‘Pendulum of Justice,’ and ‘Trails of Injustice.’

The High Cost of Invention Theft

Guest post by Dale Halling 

Edwin Armstrong is the inventor of FM radio, the Regeneration receiver, Super Regeneration, Superheterodyne, and much else.  This creative genius’s life was however wasted fighting RCA, who blatantly stole his patents for FM, and the Federal Communications Commission (FCC), who arbitrarily moved the FM radio range from 44-50 MHz to 88-108 MHz (where it is today) just to destroy the network of radio stations Armstrong had built up. 

If not for this arbitrary decision, Channel 1 on U.S. TV would be at 44-50MHz. This is why Channel 1 does not exist. 

The failure of the government to protect property rights and the arbitrary power given the FCC kept all of us from enjoying FM radio decades earlier, arbitrarily destroyed the investment of hundreds of people, and diverted Armstrong from inventing—which undoubtedly deprived us of other great inventions. 

Edwin Armstrong's struggle encapsulates everything that is wrong with the United States today.

Here is a great article on this genius of radio communications: Edwin Howard Armstrong (1890 to 1954).

Of course the anti-patent crowd does not believe in genius, at least in the technical arts.  Economists argue that someone would of come up with these inventions because of market demand.  (How? Somehow?) This is absurd. First of all there is no “market demand” for something that does not exist. (Did you know you wanted an iPad before Steve Jobs invented it?) Second, all macroeconomic evidence shows that in the absence of property rights for inventions, technological change is glacially slow and mankind falls back into the Malthusian Trap.

This is not somewhere we want to travel.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog.

Scarcity and Intellectual Property, 3: Empirical Evidence of Adoption/Distribution of Technology

Guest post by Dale Halling from the State of Innovation blog.

A NUMBER OF ALLEGED SCHOLARS suggest the logical basis for property rights is scarcity[1], since property rights efficiently allocate these resources and avoid conflicts.  These alleged scholars argue that ideas and inventions are not subject to scarcity and therefore intellectual property rights should not exist.  These arguments seem to be particularly prevalent among Libertarians, particularly those at the Cato Institute and Von Mises Institute, and among the open source community.

In this third article we will examine whether there is a lack of scarcity in the adoption and distribution of new technology.

According to this theory, property rights inhere only in the tangible property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it can only be owned by one person at a time and it takes resources to create.  According to this theory however, intangible or intellectual property such as patents and copyrights (and software in the case of the open source community, is not scarce) so is not property.  Multiple people may own intellectual property without excluding others from the property.  According to Tom G. Palmer a proponent of the scarcity theory of property:

It is this scarcity that gives rise to property rights.  Intellectual property rights, however, do not rest on a natural  scarcity of goods, but on an “artificial, self created scarcity.”[2]

If Mr. Palmer is correct we would expect that in the absence of intellectual property rights new technologies would be instantly and universally adopted. Let’s examine that.

SCIENTIFIC PRINCIPLES ARE NOT subject to intellectual property rights.  Calculus was discovered over 300 year ago and is not the subject of intellectual property rights.  Despite this even in the most advanced economies only a small percentage of the population understands it.  Even though books on the subject can be reviewed for free at many libraries, those people that do understand calculus generally paid an instructor to learn this area of maths.  Almost everything a student learns through formal education, even in graduate school, is information that is readily available.  Even if the text book is copyrighted, the information is usually available in a non-copyrighted form or available for free from a library.  Despite this the U.S. spends over $500 billion a year on all forms of education.  Clearly, the cost of adopting and distribution ideas including inventions is not free and is subject to scarcity.

According to venture capitalists, most start-ups will spend 2-10 times the amount on marketing their inventions than on developing them.  If the distribution of ideas was free, not subject to scarcity, this would clearly be unnecessary.

University professors, doctors, lawyers, engineers, judges, marketers, sales people and computer scientists are mainly in the business of distributing or implementing known information.  If distributing information is free, not subject to scarcity, then all these people should either be thrown in jail for fraud or paid less than the average day laborer.

The U.S. has historically provided the strongest legal protection for inventions.[3]  The U.S. is not only the leader in the creation of new technology, but has had the fastest adoption and diffusion of new technologies.  Countries that had or have weak patent laws are associated with the slowest adoption and diffusion rates for new technologies.  This is in complete contradiction to the expected result predicted by advocates of the scarcity theory of property.

Those libertarians and open source advocates are clearly incorrect that inventions and ideas are not subject to scarcity.  This scarcity is not artificially induced, since strong patent laws are associate with greater rates of technology adoption and diffusion, not less.

Advocates of the scarcity theory of property are correct that two people can understand the same idea (calculus) without diminishing the supply of the idea.  However, this is not the same thing as both people being the inventor of or discover of the idea.  Just because I understand calculus does not make me the discoverer of calculus any more than understanding how a steam engine works makes me the inventor of the steam engine.  If I were to conceive special relativity without any knowledge that Einstein had already discovered special relativity, this would not make me the discoverer of special relativity.  I did not add any information to the store of human knowledge by my independent discovery.  The same is true of inventors, just because someone independently comes up with an idea after the inventor, does not make them an inventor.  An inventor is the person who adds to the store of human knowledge.  Being second, even without knowing that you are second, does not add to the store of human knowledge or make you an inventor.  The patent laws require the inventor to be the first in the world to create an idea.

THE DEBATE OVER WHETHER property rights are conceptually based on scarcity or based on the right of a person to their labor both physical and mental is not just an academic exercise.  Failure to provide strong legal protection to inventors has severe consequences for our wealth and well-being.  The U.S. in particular does not have the luxury of just adopting other countries’ technology to produce an increasing standard of living for its citizens, it must innovate.  By denying the value of intellectual labor, libertarians have more closely aligned themselves with Marx’s labor (physical) theory of value than with the free market. 

Adopting their approach will result in the same disastrous consequences as has occurred to countries that have adopted Marx’s ideas in other realms.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book “The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.”
Read his regular thoughts at his State of Innovation blog.

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[1] Kinsella, Stephen, Against Intellectual Property  and Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, pp. 817- 865.
[2] Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, p. 865.
[3] Khan, Zorina B., The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, Cambridge University Press, 2005, p. 298.

Scarcity and Intellectual Property, 2: Empirical Evidence for Inventions

Guest post by Dale Halling

A NUMBER OF ALLEGED scholars[1] suggest the logical basis for property rights is scarcity—that property rights efficiently allocate scarce resources and so avoid conflicts.  These alleged scholars argue that ideas and inventions are not subject to scarcity and, therefore, intellectual property rights should not exist.  These arguments seem to be particularly prevalent among libertarians, particularly those at the Cato and Mises Institutes and among the open source community.  In this article we will examine whether there is a lack of scarcity in the creation of ideas.

According to this theory, tangible property rights include only real property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it takes resources to create and can only be owned by one person at a time.  According to this theory however, intangible or intellectual property such as patents and copyrights (and software according to the arguments of the open source community) is not scarce, which means multiple people may own intellectual property without excluding others from the property.  According to Tom G. Palmer a proponent of the “scarcity theory” of property:

It is this scarcity that gives rise to property rights. Intellectual property rights, however, do not rest on a natural scarcity of goods, but on an “artificial, self created scarcity.”[2]

Scarcity however is neither the historical nor the logical basis of private property rights.

PATENTS, ONE OF THE TYPES of intellectual property rights, are based on creating new ideas or inventions.  The number of potential inventions appears to be almost limitless.  For instance, Paul Romer, a professor of economics at Stanford states:

On any conceivable horizon — I’ll say until about 5 billion years from now, when the sun explodes — we’re not going to run out of discoveries. Just ask how many things we could make by taking the elements from the periodic table and mixing them together. There’s a simple mathematical calculation: It’s 10 followed by 30 zeros. In contrast, 10 followed by 19 zeros is about how much time has elapsed since the universe was created.[3]

Someone might object that Paul Romer has overstated the number of possible chemical inventions, since not all elements are able to chemically bind to each other.  On the other hand, this calculation only includes one of each element.  Some of our most important chemical compounds contain long chains of carbon and silicon atoms.  In addition, the elements can bond to each other in multiple ways, ionic bonds, covalent bonds, polar covalent bonds and hydrogen bonds.  Elements may also have double, triple and quadruple bonds.  When you add in all these variations, Dr. Romer probably underestimated the number of possible chemical inventions.  And this calculation is only for chemistry.  When you consider computer networks or electronic circuits with millions of transistors or nodes the number of different possible connection is n(n-1)/2 or easily equal to the number of combinations described for chemistry.  This does not begin to name all the possible number of inventions.  This would seem to argue for a lack of scarcity on the conception of ideas or inventions.

That’s not the whole story, however.

Although there are an unlimited number of potential inventions, this does not mean that creating them is free.  The U.S. spends over $300 billion a year on research and development to discover inventions.[4] Either these people are wasting a tremendous amount of money on a fraud, or producing inventions really is subject to scarcity. 

The fact is that conceiving inventions takes scarce resources.  Researchers are scarce. The availability of research facilities and research equipment are all subject to scarcity.  Each researcher’s ability and their time to pursue various inventions and discoveries is limited. 

Clearly, the proponents of the scarcity theory of property are incorrect on this and much else: the development of inventions and innovations really is subject to scarcity.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog.

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[1] Kinsella, Stephen, Against Intellectual Property and Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, pp. 817- 865.

[2] Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, p. 865.

[3] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on growth, technological change, and an unlimited human future”, Reason, December 2001.

[4] Kao, John, Innovation Nation: How America is losing its Innovation Edge, Why it Matter, and What We Can Do to Get it Back, Free Press, 2007, p. 39

“Scarcity” – Does it Prove Intellectual Property is Unjustified?

Guest post by Dale Halling from the State of Innovation blog.

Too many people today don’t understand property rights—even those people whom you might think would be most likely to.  Cato, Reason and the Mises Institute are just three out of many whose otherwise good work in many areas is undermined by their complete ignorance on property rights, especially intellectual property rights.

As Dale Halling explains, their error lies in their misunderstanding (or in some cases abject disinterest) in the derivation of property rights. “They have adopted the Utilitarian point of view that property rights are just an efficient way of allocating scarce resources.”  But this is not the justification for property rights, simply a beneficent consequence.  Cato, Reason, the Mises Institute et al confuse consequence for cause, and in so doing obliterate that which they should be defending.

Adam Mossoff explains has talked extensively on this nonsense, explaining that Jeremy Bentham’s ideas are at the root of these “libertarian” attacks on Intellectual Property.  “Bentham’s basic philosophy was Utilitarianism, i.e., the so-called ‘greatest good for the greatest number.’ Bentham argued the justification for property rights was scarcity and conflict resolution, not natural rights… This is the philosophical point of view used by the Cato Institute, the Von Mises Institute et al to attack patents and copyrights.”

The packaging of utilitarianism and property rights is a complete mess. Bentham himself was an opponent of rights altogether, famously calling them “nonsense on stilts,” so it’s no surprise that today’s Benthamites find themselves opposed as well.

The fact is however, as Mossoff explains, Utilitarianism’s ‘greatest good for the greatest number’ never even achieves its purported goal; its end result is always some form of  totalitarianism. “The reason for this [summarises Halling] is that utilitarianism is merely a justification for short term actions. Once something has been produced, it always looks like the greatest good is to redistribute the creation.” That this sounds like the underlying ethic of every socialist “workers paradise” ever invented is no accident; in fact it is the same ethic in theory, and leads to the same result in prcatice: poverty and coercion. Redistribution of already-produced creations might sound good to the unthinking, “however, this is clearly only true in the short term. In the long term it is clear that this always destroys the economy, rights, and rights-holders.  Stealing the product of one’s mind (mental labor is labor) is no different than banning free speech. It stifles the mind, which source of all economic progress (values).”

The confusion over the status of Intellectual Property must be repaired. Which means the package deal of using utilitarianism to ‘justify’ rights must be untangled. Craig Biddle explains very simply the correct derivation of rights here, wiping away several dangerous confusions in the process. And Dale Halling discuss the historical and theoretical fallacies behind the scarcity theory of property right here in this Guest Post. Enjoy!

The confusion over the status of Intellectual Property must be repaired. Which means the package deal of using utilitarianism to ‘justify’ rights must be untangled. Craig Biddle explains very simply the correct derivation of rights here. And Dale Halling discuss the fallacies behind the scarcity theory of property right here:at my post Scarcity: Does it Prove Intellectual Property is Unjustified and Scarcity -2 and Scarcity -3.  Mossoff points out that  (IP).

Scarcity – Does it Prove Intellectual Property is Unjustified?

A NUMBER OF ALLEGED SCHOLARS [1] have recently suggested that the logical basis for tangible property rights is scarcity.  Property rights efficiently allocate these resources and avoid conflicts between competing rights of individuals.  These scholars argue that ideas and invention are not subject to scarcity and therefore intellectual property rights should not exist.  These arguments seem to be particularly prevalent among libertarians, including the Cato Institute the Von Mises Institute and the open-source community.

Tangible property rights include real property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it can only be owned by one person at a time and it takes resources to create.  According to this theory, intangible or intellectual property such as patents and copyrights, and software in the case of the open source community, is not scarce so can not be accorded property rights status.  Intangible property can be owned by multiple people without excluding others from the same property, which according to them is the defining characteristic of property..  According to Tom G. Palmer for example, a proponent of this “scarcity” theory of property:

          It is this scarcity that gives rise to property rights.  Intellectual property rights, however, do not rest 
         on a natural scarcity of goods, but on an “artificial, self created scarcity.”[2]

Scarcity however is neither the historical nor logical basis of private property rights.  The historical justification of property rights is based on the right that a person owns himself.  If you do not own yourself, you are a slave.  If you own yourself then you own the fruits of your labor, physical and mental.  This is commonly referred to the “natural rights labor theory of property.”

In the pre-capitalist era, private property existed de facto, but not de jure, i.e., by custom and sufferance, rather than by right or by law.  In law and in principle, all property belonged to the head of the tribe, the king, and was held only by his permission, which could and often was revoked at any time, at his pleasure. [3]  [This is the basis of the fee simple title which is still issued these days in NZ, a legal fiction that remains as a vestige of this tradition that is unfortunately these days becoming a reality again all too quickly.]

The labor theory of property provided the first foundation of property rights as opposed to respecting property simply as a custom.  As a result, the scholars who suggest that property rights are based on scarcity are incorrect historically.

DESPITE THIS HISTORICAL INACCURACY, some of these alleged scholars might still argue that “scarcity” is still nonetheless a better theoretical framework for the justification of property rights.  But this is still not true.

The natural rights labor theory of property explains why slavery is immoral.  If you own yourself, then no one else has the right to own you.  It also explains why murder and manslaughter are immoral, why stealing is immoral, why assault and battery are immoral and why we have laws against all these actions.  The natural rights labor theory defines how property should be allocated and how people come into possession of property morally and legally.  The labor theory explains all of our basic criminal law and all of our basic property laws. 

But what does scarcity explain?  It offers no justification for why slavery, murder, manslaughter, assault and and theft are immoral, except that they are “inefficient at allocating resources.”  Thus, all of these crimes would be allowed if they were efficient at allocating resources.  [In effect, as Bob Jones one joked, their only argument against Hitler’s extermination of millions of human beings would be the size of his gas bill.]

The “scarcity” theory does not explain why these wrongs are wrong. But nor yet does it define who has ownership in any particular property, nor why they should have this ownership in property recognised.  It merely explains that private property ownership is an efficient manner in allocating scarce resources, then ignores completely the question of who is entitled to enjoy these rights.

The “scarcity” theory is neither complete nor accurate.

On top of that, it also requires the additional assumption that it is “preferable” [why? because we said so, that’s why] to have efficient allocation of resources. So it is neither complete, nor accurate, and in addition it begins begging other questions it also fails to answer.

IN SCIENCE, THE THEORY that has the greatest ability to explain the widest number of facts is considered to be the correct or better theory.  Here the “scarcity” theory of private property fails to integrate at all the facts it needs to explain while requiring additional assumptions it can’t explain.

It fails to recognise how a resource is created; it has no basis for explaining how a resource should be initially distributed; it does not explain how property law determines ownership; and it has no power at all to explain criminal law.

Trading scarcity for the labor theory of property is like trading the theory that “what goes up must come down” for Newton’s Law of gravity.  The fact of the matter is that the proponents of scarcity have confused cause with effect.  A system of private property results in efficient allocation of resource, but it is not the reason for private property – it is the effect of private property.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog.

Google, Motorola Mobility and the Patent Wars

Guest post by patent specialist Dale Halling

Google agreed to acquire Motorola Mobility for $12.5 billion.  Most people believe the main motivation for Google was to acquire Motorola’s patent portfolio of over 17,000 patents and patent applications.  The comments on this deal encompass all the insanity around the  Patent Wars.  Below I will discuss some of these issues

Business Deal
Is this a good deal for Google?  Does it make economic sense?  In buying Motorola, Google gets a company that has been in the forefront of mobile communications since its inception. 
    The biggest risk is that Motorola is a bit bureaucratic.  They were slow to develop CDMA phones in the 90s and never completely recovered.  Motorola has been hardware focused, when the industry is clearly being driven by software advances now. 
    The main reason for acquiring Motorola is to get their patents and leverage them into freedom of action in the Android market space.

Innovation and Paying for Patents
There are numerous people complaining that Google’s $12.5 billion is being spent on patents instead of being spent on engineers and products.  Actually, spending money on patents IS spending money on engineers.  Engineers created the inventions and the patents just provide legal title to the inventions.  When companies spend money acquiring patents they are spending money for the development of inventions and therefore engineers. 
    If inventions are not protectable, companies do not spend more on engineers they spend less.  They just take other people’s inventions, rather than paying for internal or external development. 
   In fact, you can trace engineering salaries and employment to strong patent laws.  Countries with weak patent laws either have very few engineers or their salaries are fairly low or both.
    New products are the result of inventions.  Increases in our level of technology are what make us wealthy.  When people pay for patents (inventions) it does not discourage innovation, instead it encourages other people to innovate.

Too Many Overly Broad Patents being Issued?
There has been a lot of wailing about too many over broad patents being issued.  This whining is coming from the same people who complained about Amazon’s one click patent, which was upheld after numerous challenges.  Why did Barnes and Noble get a 10x increase in online sales (after copying Amazon’s one-click technology) if the one click patent was not innovative?
    All objective measures of patent quality have been increasing for years.  For instance, the metrics of GDP-per-patent, R&D-dollars-per-patent, and number-of-citations-per-patent have all been on the increase.  For more information see my post Patent Quality Nonsense.
    Do some bad patents get issued?  Absolutely and some of my clients have been affected by this.  However, most people making the claim that there are too many bad or overly broad patents do not even know that the scope of a patent is determined by its claims.  They do not know that claims cannot be read like prose, they have to be read like an equation where every word has to be given meaning.

Litigation Explosion
    Many people see this acquisition as just another outgrowth of the numerous frivolous patent cases being filed.  However, the facts do not support this point of view.  Judge Michel, former head of the CAFC, the court which hears all patent appeals, points out that the number of patent suits filed each year has remained constant at less than three thousand.  Only about 100 of these suits ever go to trial.  In a technology based, $14.5 trillion economy with over 300 million people and 1 million active patents- THIS IS A TRIVIAL NUMBER.

Solutions
Are there any problems with our patent system?  Absolutely.  The underfunding of the patent office causes inventors to wait years and even up to a decade to receive their patent. 
    But, more specifically to the Google/Motorola case, the wireless smart phone space needs a more efficient method of clearing patent rights.  I suggest a non-profit entity similar to ASCAP, which clears copyrights for musicians and composers.  For more information see my post Patent Wars a Market Solution.
    Finally, for those worried about the poor, small company who had a great idea for an app and are now scared they may find themselves embroiled in a patent lawsuit- GET A PATENT CLEARANCE OPINION before you develop.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog, and his other Guest Posts here.

GUEST POST: The Myth that Patents are a Monopoly [updated]

Guest post by patent specialist Dale Halling 

A patent gives the holder the right to exclude others from making, using or selling the invention.  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 give 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.

According to Wikipedia “In economics, a government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.”  Since patents are clearly “government granted”, then this is the appropriate definition.  Since a patent does not even provide the holder the right to sell their invention, it clearly does not grant an exclusive privilege to a firm to be the sole provider of a good or service.

There is a lot of nonsense in the economic profession about monopolies.  Even the definition above can lead to nonsense.  For instance, according to Locke’s Natural Rights theory you own yourself so you own the product of your labor, both mental and physical.  This means anything you produce you have the exclusive right to make and sell, does this make you a monopolist?

The historical basis for monopolies is the Statute of Monopolies of 1623 in England.  The Statute of Monopolies prohibited the Crown from issuing monopolies for items that were already known or being produced.  The idea was to protect the Natural Rights of Englishmen to practice their craft, in today’s language the government in issuing a monopoly was interfering with private citizens rights to their property.  However, the Statute did not prevent an exclusive grant for inventions.  The reason for this in the words of the day was an invention did not interfere or take away anything from private citizens.  The invention did not exist before it was invented, so it does not take away anything from private citizens to provide a limited term property right to the inventor.

Modern antitrust law has turned the concept of monopolies on their head.  Instead of being a limitation on government power, like the Statute of Monopolies, it is a limitation on private action.  Instead of protecting people’s rights to their property, like the Statute of Monopolies, it limits or takes away private property.  The only logically consistent definition of a monopoly is an exclusive right to a market.  No property right, gives you an exclusive right to a market.  Market success is not an exclusive right to a market.  Only the government can create a monopoly.

People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog.

UPDATE:  Local Intellectual Property lawyer Imperator Fish busts a few more myths about patents and other intellectual property.

GUEST POST: Sustainability Isn’t Sustainable

Guest post by patent specialist Dale Halling

Sustainability is all the rage today.  What do we mean by sustainability?  There are numerous and conflicting definitions of what sustainability means.  However, most sources point to the World Commission on Environment and Development (WCED), also known as the Brundtland Report.  
    According to the 1987 Brundtland Report, sustainability is:

Meeting the needs of the present generation without
compromising the ability of future generations
to meet their needs.[1]

This definition is not testable and is incredibly vague.  Let’s take the word “sustainable” literally.  A sustainable technology would be one that can be used indefinitely by humans without side effects and without any diminution in its effectiveness.  This definition violates the laws of physics.  Entropy is the second law of thermodynamics and is normally defined as the measure of the disorder of a system or a measure of the energy not available for work.  Entropy was discovered as part of thermodynamics and it explains that a perpetual motion machine is impossible.  Entropy always increases in a closed system.  Sustainability taken literally is an attempt to create a perpetual motion machine.
    Some of the key issues for the sustainability crowd revolve around so called non-renewable resources, such as the use of fossil fuels and the using up of other natural resources.  The way this is often phrased today is Peak Oil, Peak Water, Peak _____ (Pick Your Favorite Resource).  [For more of the same, see Peak Everything: Eight Things We are Running Out of and Why.[2]]
    Peak Oil (natural resource) allegedly occurs when the amount of oil that can be extracted reaches its maximum or the point at which we reach the maximum net energy output from oil.  The alternative definition takes into account that even if we can extract more oil, this is irrelevant if it takes more energy to extract the oil than we receive from the oil. 
    The supposed solution for our “Peak Oil problem” is to develop renewable energy resources.  The Clean Energy website provides the following definition:

Renewable energy is natural energy which does not have a
limited supply.  Renewable energy can be used over and over
again, and will never run out.[3]

    What is “natural” energy?  Either all energy is natural and comes from nature, or only animal muscle power is natural.  The “natural” qualification is complete nonsense – unless they really want us to go back to animal muscle only. 
    Moreover, the “never run out” qualification itself violates entropy.  All energy resources will run out eventually.All energy sources—fossil fuels, solar, hydroelectric, tidal, biomass, hydrothermal, fission, fusion, etc.—are at base solar, or at least stellar.**  And the Sun will not last forever and does not provide unlimited energy.  The concept of renewable energy that “will never run out” and “can be used over and over again” is fatuous nonsense.  It violates the second law of thermodynamics, entropy.
    This concept of “peak resources” is not new.  For instance, the fertilizer crisis of the 19^th century.  In 1830 it was discovered that guano was an excellent fertilizer.  Population exploded, as guano was used in Europe, because of the additional food that was produced because of this excellent fertilizer and mechanization.  The best sources of guano began to run out fairly quickly.  People predicted the equivalent of “Peak Guano.”  The question was not whether we would have “Peak Guano,” but Peak Fertilizer?  We did not have a guano problem we had an invention problem.  The Haber-Bosch process was invented in 1909, which allowed fixing nitrogen in air and solved the “Peak Guano” problem.^[5]
      And therein lies the lesson.
    Reason magazine’s article “Peak Everything?” discusses how logical, scientific projections showed we would run out of lithium, neodymium, and phosphorus.^[6] “Peak lithium” was going to limit the batteries necessary for electric cars.  In fact, we would run out of lithium faster than we would run out of oil.  The solution is a new invention that replaces lithium with zinc air batteries.  Note that the solution was not a better way to extract lithium, but to make the supply of lithium irrelevant.  It is a paradigm shift created by a new invention. 
    Peak neodymium is going to limit our ability to build the electric motors of hybrid cars as well as other products.  Interestingly, neodymium magnets were invented to overcome the problem of peak cobalt.  In the area of permanent magnets, it appears that a new induction motor will eliminate the need for permanent magnets. 
    Peak phosphorus is a repeat of Peak Guano.  Peak phosphorous threatens our ability to provide enough fertilizer for our agricultural needs.  One solution, recognises that phosphorous is a product of human urine.  The phosphorous can be recycled using a no-mix toilet.
    The lesson should be obvious:

Paul Romer has observed, “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.”[7]

    The computer industry was also beset by predictions of impeding doom when it could no longer achieve Moore’s law of doubling the number of transistors every eighteen months.  Ray Kurzweil has shown that if you restate Moore’s law as computational power, every time a technology reaches its limit to improve computational power a new technology takes over.  Using this he shows that computational power has been growing exponentially since 1900.  The first computational devices were electromechanical.  When this reached their limit, they were replaced with relay devices, then these were replaced with vacuum tubes, then transistors, and then integrated circuits.^[8]
    Life is a fight against entropy.  The unique way humans overcome entropy is by inventing.  Inventing is the answer to “Peak Anything.”
    Inventions are not subject to diminishing returns or entropy.  Potential inventions grow factorially, which is much faster than diminishing returns from natural resources shrinks.  We do not have a natural resources problem, we have an invention problem. 
    The sustainability crowd are not pushing science, they are pushing a political slogan.  And in the process, by diverting resources from the most promising technologies to the most politically acceptable, they are actually inhibiting new technologies from being developed.

* * * *

** (Hydroelectric energy, for example is the result of the Sun heating the oceans or other large bodies of water.  As the water evaporates and then condenses in the form of rain or snow on land masses it is collected in dams.  The dams converted the gravitation force of the water into electric energy.  Fossil fuels are created by plants converting sunlight into biomass (including animals).  The biomass is trapped underground by sea sediment and the pressure and heat converts the biomass into oil, coal, natural gas, etc.[4] Fission is the process whereby heavy elements, generally Uranium, are split into lighter elements and energy is released.  These heavy elements were created in a star that has long since expired.  Thus, all energy is Solar or at least stellar.)

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog. This post, with all its references, originally appeared THere.

GUEST POST: More on the Myth that Patents are Monopolies

Guest post by patent specialist Dale Halling

David Kline, author of Rembrandts in the Attic, has added the following insights from history on the idea that patents are monopolies.

The condemnation of monopolies ought not to extend to patents, by which the originator of a new process is permitted to enjoy, for a limited period, the exclusive privilege of using his own improvement. This is not making the commodity dearer for his benefit, but merely postponing a part of the increased cheapness (or excellence) which the public owe to the inventor, in order to compensate and reward him for his service.
     - John Stuart Mill, Principles of Political Economy, 1848

The dawn of the right of inventors has been actually [contemporaneous] with the destruction of monopolies odious to the common justice of men; and the common sense of mankind has marked a distinction between such monopolies and the exclusive rights conceded to inventors. Their rights, under patents, are called ‘monopolies’ only from the poverty of language, which has failed to express in words a distinction which no less clearly exists.
     - Louis Wolowski, Chair of Industrial Economics, Conservatoire des Arts et Métiers, 1864

How can the exclusive right of an invention be compared with a monopoly in trade? How can the exclusive privilege to sell salt in Elizabeth’s time, which added not one bushel to the production, but which enriched the monopolist and robbed the community, and the exclusive right of Whitney to his cotton gin, which has added hundreds of millions to the products and exports of the country, be both branded, with equal justice, with the odious name of monopoly?
      - George H. Knight, 1891 :

A patent is a property right, it is not a monopoly.  For more information see  my post The Myth That Patents are Monopoly.

* * * * *

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog.

The High Cost of Marketing and Selling an Invention

Guest post by patent attorney, entrepreneur and author Dale Halling.

Inventors and critics of the patent system often ignore or are ignorant of the high cost of marketing and selling a new product embodying an invention.   I discussed this cost in an earlier post, Invention- A Financial Analysis.  This cost is the variable Mi in the equation I developed as part of the financial analysis.  Another paper that discusses this additional cost that inventors incur in marketing and selling their invention compared to a “me-too producer” is The Nature and Function of the Patent System[1].  Kitch, the author, explains:

Even in the case of an innovation patented in fully commercial form – as is the case with many relatively trivial patents – the firm must make significant investments to simply distribute and market the invention.  But expenditures necessary to identify the market for the product and to persuade potential customers of its utility can easily be captured by competitive imitations.  Absent a patent on the product, the incentives to provide information to purchasers about their need for a product as opposed to information about the particular characteristics of the seller’s product are limited.  The trademark law protects only the names and symbols identifying the seller’s product; it confers no protection against imitators of the product itself.  Thus competitors can ride on the demand for the product created by the first seller without incurring the expenses necessary to inform buyers of the advantages of the product.  Only in the case of a patented product in a firm able to make the expenditures necessary to bring the advantages of the product to the attention of the customer without fear of competitive appropriation if the product proves successful. 
    This aspect of the cost of introducing innovations is stressed here both because managements find that marketing is a major cost in innovation and to illustrate that even in the case where nothing remains but to make and sell the patented invention, there are significant costs whose return could be appropriated by competitors.  Absent a patent, firms have less than the optimal incentive to invest in providing information about and techniques for using the new technology.[2]

Inventors need to take these additional costs into account when undertaking a new venture.  There are several strategies that can be used to reduce these costs.  For instance, teaming with an existing company that has a strong market presence (marketing channel partner) in your marketplace.  Another solution is to invent only line extensions to a company’s existing products.  This second solution is common for large companies and is why large companies are not known for inventing revolutionary or disruptive technologies.

Critics of the patent system have to answer why they believe inventors will develop new technologies when it puts them at a cost disadvantage compared to copiers.

[1] Kitch, Edmund W., The Nature and Function of the Patent System, Journal of Law and Economics, Vo. 20, No. 2 (Oct., 1977) pp. 265-290.
[2] Ibid. p. 277

Innovation vs. Invention

Guest post by author, patent attorney and entrepreneur, Dale Halling

I believe there is a lot of confusion regarding the difference between invention and innovation.  This confusion is the result of erroneous definitions and the purposeful intent of some to increase their importance by belittling the contributions of others.

I believe that most of this mischief started with the great economist Joseph Schumpeter.  According to Wikipedia:

Following Schumpeter, contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice.

There is nothing inherently wrong with the distinction above, but the way it is applied blurs together a number of different skills.  Blurring skills together shows a misunderstanding of the process of innovating. 

Broadly speaking, innovation can be broken into two distinct sets of skills: creation and dissemination.  By creation I mean creating something new; not simply production – creating something old.

Invention is a subset of creation.  An invention is a creation with an objective repeatable result.  A creation that is not an invention has a subjective result, such as the effect of a painting on a viewer, or the effect of a book on a reader.  Many activities combine both a subjective creation and an invention, such as architecture.  However, we can separate out the invention from the other creative elements and this helps our understanding of the process.

Dissemination may include a number of processes, such as education (marketing, sales), manufacturing, finance, and management.  This is not to say that marketing cannot be creative, it clearly often is very creative.  However, the creative part of marketing can be separated out from the dissemination or execution part of marketing.  The same is true of manufacturing, which can definitely include inventing.  But an invention related to manufacturing is part of the creation step, not part of the dissemination step.

Finance can also have inventions.  For instance, the invention of a fractional-reserve ratio bank is clearly an invention.  It has the objective result of securitizing assets and turning them into loans and currency.  A fractional reserve bank will securitize land and turn into a loan and currency.  Despite this, [and leaving aside all the arguments about the legitimacy or security of a fractional-reserve banking system] it is important to understand that the first person to develop the fractional-reserve bank is inventing and the person operating the fractional-reserve bank is disseminating.

All real per-capita economic progress is the result of inventing.  This is not to say that it is unnecessary to disseminate inventions, but if there were no new inventions there would not be any economic progress. Once all the existing inventions had been completely disseminated, we would be stuck in a declining world of diminishing returns. [“The law of diminishing returns applies in a given state of technology, but not under the conditions of an improving state of technology.” – George Reisman.] Of course, if we stop all dissemination activities altogether we will quickly starve to death.

It is my belief that business and economic professors have focused on “innovation” instead of “invention” because they have no idea how to invent or how the process of how inventing works.  They concentrate on what they know, i.e. business and economic practices.   As a result, the focus is dissemination,  under-appreciating the importance of inventing.  In addition, it results in misleading business theories such as these:

• “Management teams are more important than the quality of the invention.”
• “Execution is everything; patents and other IP do not matter.”
• “Get Big Fast.”

The truth-test of these theories is directly related to the strength of the patent laws at the time the company is created.  When patent laws are weak, these theories are more true and when patent laws are strong, these theories are less true.  Unfortunately, when patent laws are weak these theories do not overcome the disincentive to invest in risky new technologies.  Management teams do not build revolutionary or disruptive technologies, they just disseminate these technologies. These sorts of teams are like large companies and generally can produce a return with less risk by NOT developing high-risk technologies.  They tend to focus on incremental technologies or on stealing someone else’s technology.  While this may be good business advice in a period of weak patents, it is bad for competitiveness and for our real standard of living.

In the long run, the only competitive business advantage is technological progress (i.e., inventing). The best management team in the world selling buggy whips at the turn of the century could not overcome the technological advance of the automobile and stay a buggy whip company.  The best management team in the world selling vacuum tubes in the 1940s, could not overcome the advance of transistors and semiconductors and stay a vacuum tube company. 

America is littered with companies that had great management teams that were overwhelmed by changes in technology.  For instance, Digital Computers had a great management team, but they could not overcome the advance of the personal computer.  Digital Computers failed to invent fast enough to overcome the onslaught of small inexpensive computers.  US steel was not able to overcome the onslaught of mini-mills, aluminium, and plastics.  This was not because they did not have a good management team, it was because the management team under-prioritized invention and over-prioritized execution or dissemination skills. 

Ford & GM have not become walking zombies because they did not have strong management teams, but because they have not invented.  As a result, they have antiquated production systems and weak technology in their products.  86% of the companies in the Fortune 500 in 1959 are no longer there.  Some of these companies disappeared because of bad management, but most companies disappeared because they did not keep up with changing technology.  In other words, they did not invent.

Inventions or advances in technology are the ONLY WAY to increase real per capita incomes and the only long term business advantage.  Business school theories that do not prioritize invention are bad for business, and bad for our prosperity.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his State of Innovation blog. 
(NB: This post originally appeared at the State of Innovation blog. It has been lightly edited and reformatted for clarity.)