Prize system has advantages over patents for innovation – the most important inventions and ideas are not covered by the patent system

The intellectual property regime is part of society's innovation system, and its intent is to provide incentives to innovate by allowing innovators to restrict the use of the knowledge they produce by allowing the imposition of charges on the use of that knowledge, thereby obtaining a return on their investment. But it is important when thinking about intellectual property rights (IPR) - which include patents, copyrights, and various other parts of the intellectual property system - to realize that there are many other parts of society's innovation system. There are other ways of financing and producing research - for instance, through universities and government-supported research labs. In fact, I would argue, perhaps [*1697] immodestly, that the most important ideas are those that are generated in universities, and many of the most important intellectual advances are not covered at all by the patent system. Look at the basic idea underlying the computer, Alan Turing's "Turing Machine": it was not protected by the patent system. 9 Ideas like asymmetric information are not covered by intellectual property. 10 Another example of important innovations not driven by IPR is the open source movement, which has been particularly successful in software. Even when research is financed by firms, there are other ways of providing returns on knowledge instead of using patents, such as trade secrets and advantages that come naturally to the first entrants in a market economy. There are also other ways of providing incentives; one of them I will discuss is a prize system, which has actually been a part of the innovation system for a couple hundred years. I will argue that, from a societal perspective, prizes have marked advantages over the patent system.