How Business Happens: 27 July 2003

RE: [spiers] More on patents

Then, I wonder how come the most successful capitalist in the world are in
America? Henry Ford, Rockefellers, Hertz Fa. Bass Fam, Bill Gates, Michael
Dell, Warren Buffet, and oh my goodness lets not forget the thousands and
thousand of poor millionaires in the country with 10 millions or less. I
guess in America a "Not So Free" market can obviously make you richer". I
wonder if there are more successful millionaires in Austria than in the USA?
What has their stock market done lately? and what do their economist have to
say? Mmmmmm. I wonder.........
-----Original Message-----
From: wileyccc@aol.com [mailto:wileyccc@aol.com]
Sent: Wednesday, July 30, 2003 2:00 PM
To: undisclosed-recipients:
Subject: [spiers] More on patents

Folks,

The first time I went from West Berlin to East Berlin, I saw communism was
bogus (and it was easier under the communists to get thru an airport or
train
station than it is in USA under the Republicans). The first time I went
from
hong Kong to china, I saw that free markets worked. When i self-studied
economics, such arguments as we see here

http://www.nationalreview.com/comment/comment-crane-pilon072903.asp

caused me to reject the Keynesians, Chicago school, Monetarists and
others.
Only the 'austrian school' made any sense, and as far as I could tell,
those
successful in business were essentially "austrian economists" even if they
never heard of Ludwig von Mises, Hayek, Say or Bastiat.

Anyway, apparently the 'free marketers' in the think tanks got flack for
paid
sophistry, so a whole lotta backpedalling going on.

But notice still, they argue about gnats and ticks and miss the 800 pound
gorilla, intellectual property rights.

john

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Folks:

Friday the House passed a bill 243 to 186 to “allow” Americans to buy
American drugs reimported from overseas. It has to get passed the senate, and
may
not.

Please don’t think the 243 that voted for reimportation are free traders.
This is hardball politics, and about rewarding friends and punishing enemies.
The end game is subsidized drugs in USA, following Ronald Reagan’s famous
formula of political economy “if it moves, tax it; if it keeps moving, regulate
it.
If it stops moving, subsidize it.” The republicans are huge fans of taxes,
regulations and subsidies (it drives the democrats crazy that the republicans
can get away with it!)

The patent is a legal monopoly. He who has a patent is beholden to the
government that issues it. Now that the govt is in neocon hands, the neocons
want
their friends rewarded and their enemies punished. Such is politics.

Far better legal and moral experts have laid out the case against patents,
and you can review those yourself..

http://www.mises.org/fullstory.asp?control=468

http://www.mises.org/journals/scholar/kinsella6%2EPDF

To my mind an end to patents is first an exercise in alternative thinking; by
considering another side you may see some opportunities. Second, since we
know patents are a bad idea, yet we do live in a patent regime country, how you
can avoid getting stuck in a patent trap? By seeing what is important, can
you limit yourself to making money while provifing a value?

The arguments against patents today are as specious (and similar) as the
arguments against the telephone monopoly before 1980. Bill McGowan thought
alternatively, said so, and started a telephone company called MCI. Of course,
we now
have more choice, better quality, lower costs and better service than before
1980 (and a tremendous increase in govt revenues from the taxes on the vastly
expanded telecommunications activity.)

And not just huge businesses can grow, the deregulation allowed small
business people to import phones. Prior to 1980 only Western Electric made
phones,
and only the phone company purveyed them. When people could buy their own
phones, it was foreigners who knew how to design and market phones that quickly
owned the USA market, by way of small business importers. A friend of mine did
quite well in the early 80’s with phones.

Herb Kelleher said airline deregulation would bring us lower costs, better
service, wider access and superior safety. Bob Crandall at American Airlines
denied this, and made the same arguments against airline deregulation that are
made against patent elimination. Herb Kelleher put his money where is mouth
was, and started Southwest Airlines, and got very rich doing it.

Anita Roddick decided in 1976 that cosmetics were developed unethically and
bad for women. Since leading retailers are able to take advantage of the
triple-whammy of trademark, patent and copyright protection the cosmetic
industry
enjoys to limit access and keep prices high, she developed her own stores to
sell her better cosmetics. She has grown quite wealthy from The Body Shop, and
recently was made Dame Anita by the Queen of England. (By the way, the
British Royal Family are notorious homeopaths, and otherwise alternative
medicine
devotees).

Of all of the changes I’ve seen in the last 30 years, transportation is
probably the most remarkable. Nixon traded the post office monopoly on parcel
post
delivery in USA for campaign contributions from UPS, and we saw massive
improvement in the efficiency of distribution in USA. Trucking deregulation has
made USA more wealthy by cutting waste and diversion. And originally it was a
federal offense to send something Fedex that did not require a Fedex reply; a
rule made to protect the post office from Fedex competition. Nobody complied
with this rule, a few huge corporations like 3M were prosecuted, but happily
they had the heft to get the rule changed back in the early 90’s.

The point here is the ‘alternative thinking” and seeing what opportunities
there are when you realize that the theory behind the rule is bunk. One more
small observation about these terribly successful people: they all have
tremendous fun doing what they do. Of course they face astonishing odds and
resistance, but when you are having that much fun, one doesn't mind a few
mosquitoes
at the camping trip.

Currently I am working on a project that relates to free trade in education
worldwide. This stems from the realization that accreditation is the Berlin
Wall of education. Like patents, accreditation is the means to keep “education”
expensive, poor quality and restricted, a means to politically reward friends
and punish enemies. If so, then what? Well, so far, although still small, my
project is terribly profitable. And although I have no particular talent in
this field, there is no shortage of very talented people who agree and are
assisting in overcoming the challenges.

So think alternatively, and know the theory behind the regime. If you learn
to spot the nonsense, you begin to see opportunities for new products and
services.

But the fact of the matter is, until we change for the better, we still do
indeed live in a patent regime, an “intellectual property right” (IPR) regime.
Here you need to know how to work within the system, like a refusenik in the
old Soviet Union.

One of the costs to keep patents in place is a huge effort to convince
everyone it is a good idea. Therefore, just about everyone assumes patents are
beneficial. You may understand patents are not beneficial. You will contract
designers, and agree to pay them a royalty, something you would do whether or
not
there are IPR laws. This would be a contract, legally binding under contract
law, between you and the designer. Of course, because of the massive and
costly IPR promotion indoctrination campaign, any given artist somehow believes
it is the IPR that secures his economic benefits, not the contract. Just as
you see people adamantly defending IPR, so will even most artists (so much for
their conceit of being independent thinkers).

So instead of wasting time trying to convince the designers they need no
IPR, at the small business level, we contract with the designers and leave any
IPR to them. That is to say, as part of our contracts, we say the designer
will be the patent holder, the copyright holder, the trademark holder, and we
will merely be “licensed to exploit the design”. In this way, all of the legal
jeopardy inherent is held by the designer, and what is valuable, the customers
for the product, belong to us. In essence we pass off the liability, keep the
asset. If and when, in the extremely unlikely case of a IPR infringement
complaint, it is the designer’s problem, not ours. And the designer’s expense,
not ours.

***

Kelleher, McGowan, Roddick, Fred Smith and you eventually will see a better
way. Those who are presently making money the old was will object to any
change of the rules that permit you freedom to do what is benedicial.

Vast sums of money are being spent to defeat this bill. And as business
people in the 60’s flocked to the Brill building in New York to have talented
songwriters compose tunes they could sell, the drug industry is flocking to the
“free market” think tanks such as American Enterprise Institute and CATO to pay
for arguments to be written against free trade and pro-IPR. The reason the
drug companies are financing these arguments is because the anti-IPR arguments
of economists such as Rothbard, von Mises, Friedman, Garrison, Hoppe, Solerno,
Block and others are making it into the mainstream.

For example, Richard Epstein at CATO gives IPR his best shot:

Epstein writes,
“Patented goods are subject to a lawful monopoly created by the state in
order to induce their creation.”

This is a bit of a stretch, a bit of folk etymology. Patents are to reward
friends, and punish enemies. We have patents in USA because Thomas Jefferson
wanted his friends, the little guy, to have some defense against the big
mercantilists.

Epstein continues... “No one thinks that new pharmaceutical drugs will be
invented by private firms that cannot receive a rate of return sufficient to
recover [various costs].”

But this is true for every product ever developed, not just the relatively
few patentable items. He goes on to say...”If drug companies cannot recoup
costs on each drug, they will not develop it.” If I cannot recoup cost on each
much I make, neither will I. This is simple Econ 101.

'The legal monopoly granted by the patent is the only mechanism that allows
the producer to recover those fixed costs...."

This is simply not true. The patent is not the ONLY mechanism. There is
another mechanism, it is called marketing, as we see with Tylenol and millions
of
products that are NOT covered by any IPR. Patents have an advantage over
marketing... it is easier to make more money with a patent. This hugely
distorts
the marketplace, where at once the patent owning companies grow bloated and
uncompetitive as they consume their ill-gotten profits, and they spread money
around like drunken sailors to think tanks in an effort to keep their
unreasonable advantage.

Further, liberals in congress write rules that apply to drug companies that
benefit their friends. Ever notice how an ad for a drug carries with it a page
or two of small print relating to scientific info regarding that drug? Do
you read the small print? This adds tremendous cost to the drug industry in
USA, which consumers must pay, which delights the liberal media owners with huge
increase in ad revenues, and pretty much insures small biz cannot get into the
drug biz in USA. At the same time a drug companies ability to market
atrophies as others who must learn to market (India) begin to out-hustle the
USA.

To argue that companies will make NO money without patents is going too far,
they will just not make as much. To argue that there will be no new medicines,
or important medicines will not be developed is presuming too much.

How do they know? Where in the world is this so? Where is the empirical
evidence? How can we know when USA floods world with cheap medicine, dumps at
below USA market price on other countries? Who knows what would develop if
foreign drug makers did not have to compete against taxpayer subsidized USA
exports? With markets massively distorted by contrived rules, how can we know
what
the economic landscape will look like absent those rules?

We do know that India has no patent regime in pharmaceuticals. We do know
that companies such as CIPLA in India do in fact develop new drugs that are
safe, inexpensive, widely available and profitable in India. Yes, they also
knock
off western drugs for the Indian and 3rd country markets, and generally
improve those drugs whereas patent holders have no interest in doing so. CIPLA
competes with other free-trade pharmaceutical companies that can knock-off USA
drugs just as easily, so CIPLA is competing agzainst the others by providing
better quality, lower cost, wider distribution and more choices. This work of
improving poor quality western patent medicine has caused them to become quite
expert, and CIPLA non-CFC inhalers are imported by drug companies around the
world such as Germany to use to deliver patent medicines to their country’s ill.
CIPLA was applauded by Mahatma Gandhi himself for making drugs during WWII
when India’s British masters could not meet the need in India. CIPLA also
develops drugs for ailments unique to India and therefore of no interest to
western drug companies. And again, profitably.

A curious argument is we should be happy with the benefit of USA
pharmaceuticals, even though the cost is high. Well, I am happiest with my
granola. I’d
be happy with my granola at 5 times the price. But I'd be happier if the
price was even lower. Just because USA drug companies cannot provide a benefit
at
a market price that does not mean no one else should be allowed to either.

There is also the “safety argument” used to scare people. The idea that
India hopes to build market share by maiming and killing its customers is a bit
of
a stretch. And as well, my doctor and my pharmacist will conspiers to harm
me, and everyon’e insurance carriers, including the importer’s, will sit idly
by is an argument too silly to spend any time on. On the other hand, the FDA
is supposedly our assurer of drug safety in the USA, and the work of Ronald
Coase and the public choice economists demonstrates this is nonsense.

The for-hire economists argue without patents the prices will fall so far
they cannot recover their costs. Again, what costs? Why are the costs so high,
so bloated?

The argument is prices will fall if patents are eliminated. Well, isn’t that
exactly the point? Isn't the crisis born of prices too high? Isn't the
solution, and the end to be desired above all that prices fall, and
dramatically?
Like long distance telephone prices fell after deregulation? And all the
benefits we got from that, in spite of the fact we were promised by the experts
that we’d lose our world renown telephone service if phone were deregulated?
We’d degenerate into a third world telephone system, like Egypt? Well, yes, we
lost Ma Bell, but we gaiined so very much more.

Isn’t the evidence rather overwhelming when we reject these arguments and
open markets to free trade we in fact see better quality, more choices, lower
cost and better service?

And doesn’t competition make prices go down? Kmart is bankrupt and Wal-Mart
is the largest retailer in the world because Wal-Mart has internal systems
that are superior and more efficient than Kmart. In fact, in the 1950’s it was
illegal for a retailer to set his own prices. There are famous cases where
retailers were “allowed” to set whatever price they wanted, opening up the whole
mass merchandiser market, with huge benefits to the consumer. And here too,
again, the arguments were the world would be worse off if the retailers could
set prices wherever they wanted. Yet here again, the world got better when
more freedom was allowed.

Right now drug companies have no incentive to be efficient. Get rid of
patents and some Sam Walton (or Abinash Batra) will so rationalize the medicine
research, development and marketing of new products that prices will fall,
quality improve, distribution widen and service be enhanced.

As a side note, these articles discussing this development mention “reimport
American drugs from 46 countries” which is another problem... the countries
from which we will NOT be allowed to import actually have much lower drug
prices, due to the fact the drug companies are paid heavy subsidies to sell the
drug
below cost. So we will not be able to buy medicine from Zimbabwe, because
USA taxpayers paid heavy subsidies to have it sold there.

Of course, entrepreneurs in Zimbabwe buy far more than they need and
re-export these first rate USA drugs to western European countries. But product
diversion is big biz, and we don’t get involved with big biz activities.

Nonetheless, some people actually still think even roads should be provided
by the govt! Think of the fantastic opportunities if private transportation
was opened to a free market.

John

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