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 French government intends to slap a tax of 12 euros on any tablet unless it runs with Windows. One might wonder why France wants to pander Microsoft, but the logic is apparently that anything that is not Windows must be pirated, and that includes Android, Linux and even MacOS. The most bizarre is that a French company, Archos, would be hurt to the benefit of an American company.

Hat-tip: Numerama via TechEYE.net.

The problem with monopolists is that they never rest. Just because an industry is working well, highly innovative and very profitable does not prevent the greedy from trying to garner monopoly under the guise of "fairness." Now the fashion industry is under attack...there is a nice article by Ed Lopez in the Freeman on the subject.

My monograph Against Intellectual Property (Mises Institute, 2008) is now available in free epub format.

Other formats (paper book, pdf) can be found here.

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.

Why are international data roaming rates so high? There does not seem to be a lot of careful analysis. I have found one EU study - in which I have been unable to find one interesting or relevant fact or analysis. So here are my own back of the envelope calculations.

How high are international data roaming rates? I have direct evidence from two providers: an Italian provider TIM charges about $10 per megabyte; a U.S. provider T-mobile charges $15 per megabyte. The typical business user uses receives about 15 megabytes per day of email. My smartphone uses about four times this. By way of contrast, you can buy a SIM from Vodafone UK with 30 megabytes of data for about $30. Wifi at the airport or a hotel runs about $10-$60 per day. Over-the-air prices charged to local customers is much lower: TIM charges $25 per month for 5 gigabytes of data, of which probably about 2 gigs is actually used, so the effective rate is about $0.0125 per megabyte. T-mobile in the US charges a similar amount for similar service.,

We can summarize the data this way: for a five day trip the typical smartphone user will pay about $1000 for international roaming or about $100 for wifi. The local user pays about $4 for the same service. In other words, the markup over the competitive cost is about 250, and the markup over close substitutes is about 10.

No doubt some small number of customers are very wealthy and happy to pay several hundred dollars a day for the convenience of keeping the same phone number, not buying a new SIM, not having to locate wifi and so forth - despite the tenfold cost reduction by doing so. Surprisingly only 40% of international roamers turn off their data roaming. In the end it seems reasonable to conclude most people use data roaming not on purpose, but by mistake. Notice that TIM advertises their price as 0.8 cents per kilobyte - which doesn't sound like much, and has meaning only if you have some idea how much data you use. When I was lost in Paris, knowing the high cost of roaming, I turned on the data service to locate myself on the map. I expected it would be expensive. What I did not expect is that a single viewing of the map would cost 100 euros - cleaning out my account and making my phone unusable in the process.

No doubt telephone companies are good at setting prices to maximize their profits. Apparently such a large number of people accidentally turn on their data services that it is profitable to charge them 250 times marginal cost rather than charge a much lower fee to the much larger group of people who would be willing to pay for the service. Such a business strategy is possible only with substantial monopoly power and illustrates well of the problem of monopoly. Each international roamer pays a thousand dollars once for which they receive practically no value. After that they know to keep the data service turned off.

How can such a business strategy be profitable? The answer lies in the phenomenal growth rate of smart phones. Smart phone sales are growing at about 50% per year. If the stock is growing at a constant rate, it must also be growing at 50% per year. Suppose the typical international roamer spends one month per year roaming, and pays $1000 for one week before shutting off the service forever. If they were willing to pay $50 per week, then charging that would bring in $200 for each member of the entire stock of roamers. Since the stock of roamers is two and a half times the number of new roamers charging $50 per week would bring in $500 rather than $1000.

The international roaming market, lacking competition, is dysfunctional: rather than providing a useful service it taxes consumers one-time lack of awareness of prices. Eventually this will sort itself out: the market for smartphones is not likely to grow at 50% a year forever. Once smartphones start to satiate the market and growth drops to more modest levels - by the calculation above, about 25% per year - it will be profitable to start charging for services received rather than for consumer errors. A similar transition took place in the within U.S. market for voice roaming years ago; originally roaming outside the local area code was extremely expensive; now all providers offer national coverage.

There is an irony in all this. The market for selling smartphones is relatively competitive, and likely the international roaming "profit" is largely given back to consumers in the form of lower prices for contract smart-phones. Relatively rich international roamers subsidize smartphones for their less wealthy and well-travelled brethren.

There is a case for government price regulation here. Of course as smartphone sales diminish, government price regulation will enhance rather than reduce collusion. Ironically the lack of competition in the mobile phone market is largely due to government policy. Governments - wishing to control the flow of information - tightly control bandwidth. Some of this is done through monopolies given or sold to television stations, usually with a quid pro quo in the form of free or subsidized political advertising as well as restrictions on content.  As another example, free wifi is not an option in Germany as the government insists on knowing exactly who is logged on to the internet. Copyright law also plays a role here, as the copyright oligarchs are eager also that nobody access the internet anonymously.

A sharper analysis should probe the source of the monopoly power in roaming. Why cannot different mobile providers in the country you are visiting compete to offer you lower data rates? Unregulated countries like Panama greet visitors with giant signs promising lower long-distant rates if you roam with them. The reason this kind of competition is not more broadly possible is because SIM cards are tied to your home provider. Other mobile providers can bill you only through that same home provider. In other words: what your home provider has is a monopoly over your good credit record and means of payment. On the face of it this sounds absurd, and it is a wonderful illustration of the fact that not all property rights are created equal. Some property rights (copyright anyone?) serve to foster monopoly, while other property rights foster competition. This has been recognized in most countries to a limited extent: you now own the property rights in your phone number. But your phone company still owns the rights to your reputation.

There many organizations who compete for the rights to your reputation: Amazon, Google Checkout, PayPal, credit card companies, mobile phone companies, and banks all compete to provide you with direct online payment. The problem is that the SIM card technology prevents mobile providers from billing any organization other than your phone company. Here is a modest proposal. The SIM card standard was imposed (as part of the GSM standard) by European governments. So let them modify the standard to require that the user be allowed to provide alternative means of billing to over-the-air telecommunications providers: the small eagerly wishing to sell providers should be able to recognize my Google Checkout to bill me for cheap data service while I keep my usual phone number. The problem of roaming costs should quickly vanish in the dust of competition.

[I am grateful to a conversation with Philippe Jehiel of the UCL although he is in no way responsible for this. After going through numerous alternatives, we agreed that the most likely explanation for high data roaming rates is exploitation of consumer error in the face of a rapid influx of new consumers. The data on growth in the smartphone market seems to bear this out.]

Following a suggestion of a commentator, and based on reading the google blog, all links in comments are now marked "nofollow". This means that while the link works as normal, it will not be counted for Google page rankings. As the comment spam is being left by human beings paid by spammers (mostly hired from Amazon Mechanical Turk apparently) we may hope that the spammers are intelligent enough not to pay for links that won't increase their page ranks and will leave us alone. I will continue to be vigilant and delete spam as it appears. Let's see if that works before introducing registration and "trusted" users.

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.

Gene Quinn, along with his site IPWatchdog.com, has been a stalwart defender of the current patent system. The honest impression that I have gotten in the past while reading his posts is that he has elevated the importance of the patent industry (and the economic benefits it has given to a discreet class) over actual innovation. Regular readers of this site might recall him being singled out by Stephan Kinsella [ http://www.againstmonopoly.org/index.php?perm=593056000000001821].

Imagine my surprise when I came across the following posts at Quinn's IpWatchdog site this past week:

http://ipwatchdog.com/2010/12/14/patent-trolls-innovation-vampires-suck-life-out-of-economy/id=13797/

http://ipwatchdog.com/2010/12/09/intellectual-ventures-becomes-patent-troll-public-enemy-1/id=13711/

http://ipwatchdog.com/2010/12/08/copyright-trolls-the-meaner-stepsister-of-patent-trolls/id=13695/ (This post is admittedly written by a guest to Quinn's site, but it is still nice to find him hosting such views).

I don't want to make too much of this. I (and I suspect other contributors to this site) still have profound disagreements with Quinn's perspective. But it nonetheless seems to mark something of a positive shift in thinking, or at least rhetorical emphasis. Even if it turns out to be slight, it is still a positive development which I welcome. A simple recognition of the harm that patent trolls cause shouldn't be difficult to admit to - even for those who are stalwart supporters of the remaining aspects of our current patent system. It is somewhat amusing to see his commentators accuse him of going over to the "dark side" and espousing "pure, unabashed anti-patent rhetoric", and then read Quinn having to defend even this reasonable and narrowly-tailored critique which he has authored.

Quinn himself admits: "I know that over the last several years I have not been one to want to jump up and down over the problems created by patent trolls..."

I hope that this will mark the opening of a more constructive dialogue. If these posts of his are any indication, then we actually share the same broad goal of maximizing innovation. Before now, I honestly wasn't sure he placed that goal as the prime directive.

So in the hopes of building further bridges of peace, love and understanding, here is a parting thought for now which I hope Quinn chews on further -

True "innovation" can't be thought of merely as the creation of a new invention, but rather, the placement of that new invention into the hands of wider society. There is no actual innovation until the practical benefits of an invention are widely disseminated for use by the general public (or as large a group as the nature of an invention practically allows for) which in turn allows them to build further on it.

I don't wish to start a philosophical conundrum akin to the question of "does a tree falling in a forest make a sound if nobody is there to hear it?" But from my perspective, a ground-breaking invention is not "innovation" if it is kept under wraps by a small secret society or elite oligarchy. The term "innovation" inherently connotes the fact that its benefits are shared by as much of the public as practically possible. The next step is debating what system would maximize that.

The gulf in views are still vast, but if we can agree on what "innovation" actually means and can also agree that maximizing it should be the primary goal IP regimes (as opposed to placing economic considerations for certain IP players as a primary end unto themselves), then we will be well on our way towards a more constructive dialogue.

This is for contributors: if you access the blog in administrative mode (edit posts) the comment bar on the right now gives you the option of deleting the comment. This should make it quick and easy to get rid of spam, so please do. Notice that if you are unsure whether a comment is spam from the preview it is always safe to click on delete - you will then see the entire post and can hit cancel or just close the page if it isn't really spam and shouldn't be deleted.