STEVE LOHR claims to examine China's new push on innovation, but it is really about the policy to promote issuing more patents link here. The government is actually providing incentives to increase the annual patent harvest, including bonuses, better housing, and tax breaks. Finally, it has set yearly targets, currently rising to 1,000,000 by 2015.

As I thought about this, I realized that patents have become a tool of international competition policy. If you are behind in the patent race, file like mad and be prepared to litigate. You may win or you can make it so expensive for others that they will agree to cross license at modest or no cost. Pretty smart, those guys. They have learned the lesson of Microsoft, Intel, Hewlett-Packard, etc. The road to monopoly riches lies through the kingdom of patents.

Sooner or later, this competitive challenge will force the US, as well as other rich developed countries to make a choice. But first we will have to recognize what is happening, Then we can face the need to decide either to abandon patents or see our lead in new technology disappear and with it much of the gains we derive from such monopolies.

I would expect that the existing patent giants will resist abandoning the patent system. They have a huge stake in its continued existence as it protects them from competition for decades and with clever follow-on invention, permanently. And they may finally decide to work with the Chinese patent holders as they feel better off with an oligopoly than with free competitive markets.

It is difficult to feel confident that our government will make the right choice, given the huge political power of the patent giants. If so, so much the worse for the average consumer. One must be particularly pessimistic because of the hold that the concepts of patents as property (even if it is only intellectual property) deserving of the same respect as physical property and of violations as robbery or piracy, to use the current word of choice in the political battle. It is really hard to convince the average consumer of the huge magnitude of the dead-weight loss they all suffer, most especially from the fees of the patent lawyers.

The New York Times lead editorial today is entitled China and Intellectual Property link here. It is a familiar litany of complaints about their theft of U S "property" with no suggestion that there might be another side to the question.

If we were in China's position, still poor and backward in so many areas, we too would try our hardest to skate around the obstacles to using the latest innovations. Innovation is the key to rapid development and national material progress. We ourselves have violated the IP of other countries when we were behind and trying to develop. Of course, that was before we had fully developed the mythology of IP as "property" and that copying without paying was robbery.

The day is coming when the China will have developed to the point where its own domestic enterprises will decide they want their IP protected and will press their government to try to compel other countries to do the same. In the meantime, China will try to get away with as much as it can, recognizing that it can trade other actions in return for giving it a pass.

It is too bad that the China probably will not recognize that its interest is in either no IP protections or a vastly limited set which narrowly defines new IP and restricts its term to only a few years. But this rationale depends on the notion that IP is beneficial only as an inducement to innovate. And that the motivation is limited to the present value of the future stream of income, which approaches zero in no more than ten years.

The present IP system in the US is marred by its harmful and excessively long term, by its grossly ambiguous and generous definition of what constitutes innovation, by the capture of the system by big business which dearly loves its monopolies, and by a legal system that grows fat on litigation.

Unfortunately, there is little reason for one to expect China to define its interest in IP protection in terms of the public's welfare. Given its nationalist roots, the authorities there are more likely to define their national interest as in extracting rents from other countries in order to enhance their relative national power. The world-wide cost is the rents it can extract from consumers around the world.

The Times closes its editorial with this, "The United States has made some progress at the World Trade Organization against the theft of intellectual property in China. But it must be much more vigilant and aggressive."

We should all mourn the deep ignorance and sophistry that lies behind that conclusion.

David Leonhardt reviews a new book, titled THE MASTER SWITCH The Rise and Fall of Information Empires by Tim Wu link here. The theme of the book is that "History shows a typical progression of information  technologies from somebody's hobby to somebody's industry;  from jury-rigged contraption to slick production marvel; from a freely  accessible channel to one strictly controlled by a single corporation or  cartel from open to closed system."

When we criticize the copyright and patent laws, the criticisms are right but we are missing the point and fighting a losing battle against the latest new thing. We are up against a world where innovation creates natural monopolies, aided and abetted by patents and copyrights.

Steve Pearlstein takes a look at the same subject and lays out a view that challenges Wu's seeming acceptance of these monopolies link here. Wu would defend his view, I suppose, by arguing that during their formative periods, these natural monopolies succeed only if they provide consumer value.

Pearlstein argues, "In theory, antitrust laws were meant to restrict such acquisitions by a monopolist. In practice, however, it hasn't worked out that way. Decades of cramped judicial opinions have so limited application of antitrust laws that each transaction can be considered only in terms of how it affects the narrowly defined niche market that an acquiring company hopes to enter."

Nevertheless, Pearlstein argues for strong antitrust action, "aggressive enforcement of the antitrust laws has been a crucial part of the history of technological innovation in this country, enforcement that allowed AT&T to be supplanted by IBM, IBM by Microsoft and Microsoft by Google. It's easy to see why Google would want to use well-chosen acquisitions to try to delay or prevent that next round of creative destruction. What's harder to understand is why we would let them do it.' An artful aid in preventing that would be to cut back on the granting of patents and copyrights.

Felix Salmon poses the question, "Can you patent financial innovations?" And answers, "no"---link here and link here.

His timely example of such a patent application is a company which makes deals with housebuyers to pay a 10% bonus on the value of the loan when it is paid off if the borrower has met all his obligations on time. Time magazine put the model on its list of the 50 Best Inventions of 2010 link here. Salmon thinks this is a neat idea because it would create an additional incentive not to walk away from an underwater mortgage.

But there is that problem of trying to patent a business model. Moreover, it is not clear to me how this model would work. The company making the offer would have to add its margin on to the market interest rate and who would borrow on those terms? In short, this story needs a lot more explanation to be credible. Moreover, the company pushing the idea has invested a lot in promoting it, raising more questions.

Mike Konczal examines whether the burden of government regulation has gotten worse, sees that in aggregate it has, and then digs down to find that it is due almost entirely to the activities of Homeland Security link here. Irrelevant for a blog on IP you will say. But wait.

In the end he notes that "One of the biggest winners over the past 9 years was the Patent and Trademark Office, which went from 6,128 employees to 10,098 employees." His comment on that: "Given how much patents are used to shut down competition and let the largest companies rent-seek, this is probably the anti-growth part I would flag. For those who know it better, is it a symptom of court decisions? Are they playing catch-up to industry demands?"

In an otherwise interesting article, the Economist ended a story on the Chinese government's campaign to produce more innovations and resulting patents with this, "If ideas are protected, Chinese people will produce more of them" link here.

Yet the rest of the article doesn't really support that conclusion. People are obtaining lots of patents, issued only since 1985, but whether they are innovations worthy of a patent remains open to question. It turns out there are two kinds of patent, a sort that requires a determination of novelty and is good for 20 years and the other, a finding of utility and good for only 10 years. The latter are far more numerous.

The other part of the story is that the government is pushing hard for more patents, offering incentives like academic tenure, residence permits in desirable cities, company bonuses, etc. The incentive effect has been obvious, in the rise of patent creating companies that sell their products on the basis of such collateral rewards. But I wouldn't sell the Chinese short over the longer run. They do respond to market incentives.

China's patent system is likely to be a problem for foreign companies which want to sell or invest there. From experience in other countries which were sticky about honoring foreign patents, until they have a substantial portfolio of their own IP, that of other countries tends to honored only sporadically and minimally.

Monopolies and the internet are the subject of articles by kdawson at Slashdot link here and Tim Wu at the Wall Street Journal link here. They note that the monopolies are innovative, but that they will not always remain so.

Actually, they are not real monopolies, but rather collectively they make up an oligopoly where the companies compete at the margins, mainly in the form of product differentiation, They are successful as long as they innovate. Why would they not continue to do so? On first thought, because they run out of innovations. But is that likely?

I don't think so. The problem here is that further innovation gets blocked by patents and copyrights so that big companies like Apple and Microsoft use their intellectual property to ward off new competitors by building an IP fence. There is competition now and it will continue so long as the industry can continue to innovate. When innovation stops, the oligopolists will be in full control and the need to do something about the industry's IP will become pressing.

Politically, it seems hard to do anything about this IP so long as innovation continues and the industry can argue it is constantly in flux. So far, the big players have been right.

Screwball uses of the patent and copyright system are occurring with increasing frequency both at home and abroad. Here is today's link here. The South Korean Army has applied for a patent on "the camouflage pattern on its newly developed combat fatigue, which would ban unauthorized use and sales of the same-patterned civilian attires and accessories. The military has been developing the new combat uniform since 2008. It will be distributed from next July to replace the current uniform within three years." The army with its political clout in the South has every reason to believe the patent will be granted.

The article suggests the reason for a patent is national security, that is to prevent "unauthorized use", say by North Koreans dressing attacking forces to confuse the southerners. I didn't think a southern law would restrain the northerners copying, if they really wanted to try to confuse an enemy, even at the risk of confusing their own side. Miracles will never cease.

Writing in the New York Times Sunday, Ashlee Vance has a long article on Microsoft that is very informative and analytical link here. The focus is on counterfeit software and how highly developed that segment of the industry has become, particularly in the poor developing world, thus appealing to the vanity of readers who believe in the value and virtue of intellectual property.

But the piece goes on to point out that Microsoft (MS) has a real interest in not seeing the counterfeiters put out of business in the third world; that keeps the low income software consumers standardized on MS products and supports its market dominance while permitting it to charge high prices elsewhere.

Similarly, competitor Linux is just as happy to have MS keep its prices high as that leaves more room in the market for its free software. This view is probably shared by the highest priced rival, Apple; though it is not mentioned in the article, it can charge a lot more as long as MS doesn't drop its prices too much.

No mention is made of Google Chrome either, I assume because its operating system does not compete head to head with MS's PC products, but that is coming in the future. It is doing quite well operating in the cloud and in other non-computer applications like cell phones. Indeed, innovation and gadgets at least raise a question about the future of the PC.

The bottom line, not drawn in the article, but which can be inferred, relates to how the industry will evolve. At this point, it appears unlikely that any other large software maker will emerge with a competitive operating system, unless it is compatible with Windows and works on the PC. There isn't room in the market place for more.

A good case can be made that the present competitive structure is stable and that it is a good thing for consumers as innovation has kept up a steady and rapid pace. A computer operating system is a natural monopoly in that it needs to permit interoperability among millions and perhaps billions of users. That is the real strength of the present marketplace, not the protection offered by copyright or patents. Yes, the latest bells and whistles tend to be expensive, but consumers have choices that are really cheap as well as the expensive ones. Add-ons to the basic software remain highly competitive and innovation has been constant. Thus, patents and copyrights have not impeded innovation or competition as is the case in so many other fields.

Not the best of all possible worlds, but it is hard to visualize how to make a better one.