What Ashok Desai Does Not Know About James Watt (or
Patents)

Prabir Purkayastha

WHEN the Mashelkar Committee’s Report was losing
credibility for “lifting” the operative part of its report from a submission
made to the committee, Ashok Desai, a well known economist and the consultant
editor of Telegraph wrote an interesting defence of Mashelkar in his column.
According to him, plagiarism was a trivial crime and the much larger issue was
the content of the report. He then proceeded to give his view on Indian
pharmaceutical industry and patents, which read more like a handout of a large
pharmaceutical company than a serious piece.

We also agree that plagiarism is a less important
issue and the far more serious one is that Mashelkar and Co. did not address the
question they were asked to examine –– whether it is TRIPS compliant to limit
patents to only New Chemical Entities. Apart from lifting the operative
paragraph from the Basheer submission denying this possibility, the Mashelkar
Report throws no further light on this question. We have discussed these issues
earlier and will not do this again. Instead, let us examine the position on
patents that Desai articulates.

Desai has three major positions. One is that patent
holders “own” the inventions. In Desai’s view, “a patent gives its owner a right
to stop anyone, including himself, from producing his invention.” This is a
rather startling formulation – that the patent holder has a right to stop even
himself from production, whatever that means. A patent holder has the sole right
for reproducing his invention and through the protection of the state, can
prevent others from doing so. It is this monopoly over reproduction of the
invention the State gives to the patent holder that is at the heart of the
patent system.

We also note that Desai seems to be quite blissfully
unaware of distinction between product and process patents. As we shall see,
this leads him astray on the content of the Indian Patents Act, 1970. According
to him, the Indian government wanted to stop the flow of foreign exchange and
therefore passed a Patents Act in 1970 that “withdrew patent protection from
food, chemical and pharmaceutical products”. The Indian companies post 1970,
“could read foreign patents, and follow the process description to produce and
sell the drugs in India”.

The Indian Patents Act, 1970 did not withdraw patent
protection from food, chemicals and pharmaceuticals. Instead, it allowed only
process patents and not product patents in food, chemical and pharmaceuticals.
That meant that you could not patent the end product itself but only the process
through which it was produced. Many of the biotechnology patents, which have
netted companies such as Monsanto billions of dollars, are process patents. So
process patents are not trivial, as Desai seems to think. The Indian companies
could not just read foreign patents and follow the process description as Desai
claims, but had to invent new processes.

Further, it was not the demand of the Indian companies
that lead to the Indian Patents Act being modified. It was the US Senate
Anti-Trust and Monopoly Subcommittee (1959-1963) headed by Senator Kefauver that
had exposed the amount of price rigging in the drug industry not only in the US
but also in India. The Committee noted that antibiotics prices were highest in
the world in India and far higher than even of the US. In the US, this led to
the Kefauver-Harris Drug Act of 1962 to control the US drug prices. In India, it
resulted in a review of the Patents Act. A number of committees went through the
Patents Act, not in order to reduce imports as Desai states, but to increase
competition and reduce pharmaceutical prices. The objective was a very simple
one: how to provide medicines at reasonable prices to the Indian people. It was
felt that removing the product monopoly would lead to more manufacturers and
therefore a competitive environment. That it allowed the Indian pharmaceutical
industry to grow was a consequence of breaking this monopoly and not the primary
objective.

A NECESSARY SOCIAL EVIL

Far from regarding India as opposed to a patent
regime, the World Intellectual Property Organisation (WIPO) at that stage used
to argue that the Indian Patents Act shows that developing countries could
provide different levels of patent protection. Therefore, WIPO recognised Indian
Patents Act as a valid form of protecting innovation, even though India had kept
out of WIPO. It was only the pressure of the US that patents entered the GATT
negotiation under the guise of Trade Related Intellectual Property Rights
(TRIPS) and finally to the change of the 1970 Act.

The need for patents has always been articulated as a
necessary social evil. The US Constitution allows the Congress, “To promote the
progress of science and useful arts, by securing for limited times to authors
and inventors the exclusive right to their respective writings and discoveries.”
Thus even in the US, this exclusive or monopoly rights is given not because the
inventor somehow owns the idea embodied in the patent but in order to promote
science and technology, therefore larger societal goals.

Patent as an incentive, gives a monopoly to the
inventor for a certain period in lieu of which he/she makes the invention
public. In economic terms, this monopoly allows the patent holder to extract
rent from all users of the patents: it is the State allowing the patent holder
the right to levy a private tax. Therefore, the question arises whether patents
(or monopolies) are the best form of providing such incentives?

Even if we accept that material incentives need to be
given to the inventors, patent monopolies however are not the only one form of
incentives. Others could be a royalty for the inventor from any producer who
wanted to work the patent, but not a monopoly over all reproduction of the
invention. This is what in patent literature would be referred to as an
automatic license of right. Or it could be the State offering prizes from its
kitty for socially useful inventions, a policy that a number of states have
followed in the past for encouraging inventors.

PROMOTING INNOVATION?

The question is whether the monopoly patent regime has
helped in promoting innovation. For this, let us start with the most celebrated
innovation, which in all text books is stated to be one of the key elements of
Industrial Revolution: the Steam Engine. James Watt perfected his version of the
steam engine for which he secured a patent in 1769. In 1775, using the influence
of Mathew Boulton, his rich and influential business partner, he succeeded in
getting the Parliament to pass an Act extending his patent till 1800. This gives
us an opportunity to examine the developments in steam engines and deciding
whether the Watts patent helped in promoting innovation or did it actually
stifle development.

The major beneficiary of the advances in steam engines
would have been the mining industry in Cornwall. Watt spent his entire time
suing the Cornish miners if they tried to make any advances over his design. The
firm of Boulton and Watts did not even manufacture steam engines then, they only
allowed others to construct the engines based on Watt’s designs for which they
claimed huge royalties. If we examine the increased efficiencies of steam
engines and plot it against time, we find that after the initial Watts
breakthrough, during the period that Watt had monopoly, all further improvements
virtually stopped, starting again only after the expiry of his patents. During
the period of Watt’s patents the U.K. added about 750 horsepower of steam
engines per year. “In the thirty years following Watt’s patents, additional
horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel
efficiency of steam engines changed little during the period of Watt’s patent;
while between 1810 and 1835 it is estimated to have increased by a factor of
five.” (Against Intellectual Monopoly by Michele Boldrin and David K Levine,
http://www.dklevine.com/general/intellectual/againstnew.htm). The major advance
in steam engine efficiency took place not because of Watt’s invention but
afterwards.

Interestingly, all those who made further advances,
such as Trevithick, did not file patents. Instead, they worked on a
collaborative model in which all advances were published in a journal
collectively maintained by the mine engineers, called the “Lean’s Engine
Reporter”. This journal published best practices as well as all advances that
were being made. This was the period that saw the fastest growth of engine
efficiency. (Collective Invention during the British Industrial Revolution: The
Case of the Cornish Pumping Engine, Alessandro Nuvolari, Eindhoven Centre for
Innovation Studies, The Netherlands, May 2001).

If we look at the research on increased patent
protection helping innovation, very little concrete evidence has ever been found
for this thesis. In fact, the evidence not only of Cornish mines but also in UK
and the US of blast furnaces in the 19th century, show that collective
innovation settings (Collective Invention, Robert Allen, Journal of Economic
Behavior and Organization 4, 1983) lead to a faster diffusion of technology and
more innovation as opposed to the closed, patent based monopolies. Thus, the
advances in the two key elements of industrial revolution – steam engines and
steel – both came out of a non-patented and open sharing environment. The recent
advances of Free and Open Source Software is not an anomaly but merely the
reflection that an open model of developing knowledge is a faster and surer way
to innovation than conferring State monopolies.

Desai may say well, may be they did not work in the
past, but currently patents are great for promoting innovation. Let us look at
the more recent data. In a forthcoming back (Innovation at Risk, Princeton
University Press by James Bessen and Michael J. Meurer,

http://researchoninnovation.org/dopatentswork/), two researchers have
analysed the numbers in terms of revenues generated from patents as against cost
of filing, maintaining and defending patents in courts. In their view, the data
shows that except in the case of pharmaceuticals, patents generate far more
litigation costs than revenue. The numbers are clear: domestic litigation costs
– 16 billion dollars in 1999 alone – was about twice the revenue for patents.
Even in this, almost two thirds of the revenue was from pharmaceuticals and
chemicals. Worse, the more innovative the company, more was the likelihood of it
being sued. The software and business method patents fared the worst, with costs
far outstripping the benefits of patenting. Even if we examine, not the broader
question of whether societies benefit due to greater innovation, but the very
narrow one of whether companies that are innovative, benefit from patenting, the
answer is that they do not. This answer that Bessen and Merurer come to is no
different from what others have discovered in the past: if patents did not
already exist, it would be a poor way of rewarding innovation.

Research of Bessen and Meurer, Boldrin and Levine also
show that patents do not promote innovation in societies either. Most of the
historical data from countries that had different forms of patent protection do
not show significantly different rates of innovation. Neither are current data
any different.

SUPER PROFITS OF PHARMA COMPANIES

We come now to the last bastion of patents: the
pharmaceutical and chemical companies. In all the high technology sections of
the economy, this is the only sector that still wants patent protection. All
others, and these include not only the IT companies but also electronics and
other advanced technology sectors have increasingly come around to the view that
the current patent regime is stifling innovation. IBM, from being an aggressive
promoter of patents and extorting royalties from its patent portfolios, is now
part of an umbrella that seeks patent reforms. Increasingly, such companies are
coming together with Free and Open Source community to oppose software and
business method patents. The pharma sector stands as the only one where large,
global companies continue to support the current patent system wholeheartedly
and push their Governments to change the patent laws of other countries. The
question here is has strengthening of the patent system, as exemplified by
TRIPS, brought about greater innovation in pharmaceuticals?

Let us look at what Fortune, not the most socialist of
magazines, says about pharmaceutical patents. “From 1992 to September 2003,
pharmaceutical companies tied up the federal courts with 494 patent suits.
That’s more than the number filed in the computer hardware, aerospace, defense,
and chemical industries combined. Those legal expenses are part of a giant,
hidden “drug tax” –– a tax that has to be paid by someone. And that someone, as
you’ll see below, is you. You don’t get the tab all at once, of course. It shows
up in higher drug costs, higher tuition bills, higher taxes – and tragically,
fewer medical miracles” – ”Americans spent $179 billion on prescription drugs in
2003. That’s up from … wait for it … $12 billion in 1980.” (The Law of
Unintended Consequences, Clifton Leaf, September 19, 2005). Yes, the
pharmaceutical companies are making money out of the patents system, however the
price is being paid by high prices and fewer drug discoveries. If patents
supposedly spur a race for innovation, this is not happening; the race is only
to the patents office and to the law courts.

Of course, American companies can charge high prices
for their drugs to the American consumers. What happens if these drug prices
then are charged from the developing countries where people have yearly income
of less than a thousand dollars? If we look at the second and third generation
of AIDS drugs, there is no way a third world patients can pay for treatment with
patented drugs: it is more than his/her yearly income. Not at these prices. So
enforcing monopoly rights of the patent holders means death sentences for such
patients.

However, this is not the only issue. The current patent regime encourages the
search for only blockbuster drugs, drugs for patients who can pay large amounts.
It neglects drug research in other areas, where patients may be many more but
who do not have the power to pay. Treating erectile dysfunction is far more
“economically” beneficial for companies than treating malaria. No surprise that
we have three new blockbuster drugs for this (Viagra being of course the most
well known one), while none for malaria.

The interesting question is why are neo-liberal
economists such as Desai, with their love of free markets, so fond of patent
monopolies, that too given by the state? The answer is quite simple. Free market
is the rhetoric; the reality is that they support global capital. And if global
capital wants monopoly, not only through market power but also through state
grants, then they will find arguments for justifying that too. Only this can
explain the steadfast support that economists from Friedman, Samuelson to Desai
extend to the patents regime, even when neither data nor the logic of free
market they supposedly espouse, support such a position.