Patent Law

IP is not an Asset: Inventors were meant to be Free

By Gary Odom and Jordan Kuhn

Earlier this week, Peter J. Wallison argued that conventions in fair value accounting may in part be the cause for the recent bubble markets. Specifically, Wallison pointed to the convention (implemented under FASB 157) that requires assets to be carried at "market" values, even when those assets are not being held for trading purposes.

Almost any scientist or engineer would immediately have recognized the truth of this argument. Our understanding of any system -- chemical, electrical, mechanical, or financial -- will be limited in part by the accuracy of our tools of measurement. When one considers how FASB 157 required banks to report the values of MBSs, CDOs, and CDO^2s on their balance sheets far above what the banks would themselves have been willing to give away for the same assets, one understands how the financial markets quickly lost track of the intrinsic value backing the securities traded.

This wisdom has direct relevance to the secondary markets for IP. Most of the firms now in the secondary markets for IP have taken the view -- and are conducting their businesses -- as if IP were an asset. This is because IP does bear some characteristics of an asset. Namely, like real and personal property, IP can be protected through exclusive rights. The analogy to property has thus come to dominate our understanding of the nature of IP.

IP is not an asset. IP is more like equity, although it is not like other equity. IP is a limited exclusive right to human capital.

Maybe part of the reason that Abraham Lincoln understood the importance of patent law is because he understood that human capital cannot be owned. The photograph shows the Emancipation Proclamation, whereby Lincoln did more for the cause of freeing human capital than many other men together have done in the course of human history. Lincoln loved the patent system because he understood that it too could lead to more freedom. Scientists and engineers work best free from the immediate demands of business people and customers. The idea of a patent system carries within itself the promise of more innovation and more freedom.

POSTSCRIPT: Please note that I do not believe that inventors are literally enslaved right now. There are obviously huge differences between the enslavement of millions of black Americans and the metaphorical enslavement of inventors who are now forced to do other kinds of work because of the broken patent system. I do, however, believe that making people more free leads always to a multiplicity of unanticipated social benefits. I have Abraham Lincoln, Martin Luther King, Jr., and Ghandi on my side here.

Full post as published by The Patent Prospector on May 10, 2008 (boomark / email).