Theoretical models prove patents increase secrecy up until monopolization.

A second widely cited benefit of patent systems – although not so much in the economics literature – is the notion that patents are a substitute for socially costly trade secrecy and improve communication about ideas. From a theoretical point of view the notion that patents are a substitute for trade secrecy fails even in the simplest model. If a secret can be kept for N years and a patent lasts M years then an innovator will patent exactly when N ≤ M. Hence, only those things will be patented for which the secret would have emerged before the patent expired, while those for which the secret can be kept will not be patented. The same remains true in more complex and realistic models such as that of Boldrin and Levine [2004], see also Ponce [2007]. It is also the case that modern “disclosure” in patents is negligible – it is essentially impossible to build a functioning device or software program from a modern patent application, a fact which is especially clear since some patented ideas do not – and cannot – work. A case in point is the patent for moving information through the fifth dimension.2

A more subtle point is that secrecy may bias the type of inventive activity away from innovations that are not easily kept secret to those that can be, vice versa for patents. There is historical evidence from Moser [2004, 2005] in this direction. In 19th Century expositions of inventions, while countries without patent systems had overall rates of innovation similar to those with a patent system, they did specialize in innovations which were more easily kept secret. How strong this bias would be if no countries had patent systems – that is, whether it is true that patents encourage innovations that would not otherwise be made, or if they just shift the location of innovation from country to country – is not known.

The related idea that patents somehow improve communication about ideas – a notion key to the “public-private” partnership between governments and private research organization in which the government funds the research and then gives the private organization a monopoly over anything developed in the course of research – is backed neither by theory or evidence. It is impossible to study the history of innovation without recognizing that inventors and innovators exchange ideas as a matter of course and that secrecy occurs, in those cases in which it occurs, only in the final stages of an innovation process, when some ambitious inventors hope to corner the market for a functioning device by patenting it. A good case in point is that of the Wright brothers, who made a modest improvement in existing flight technology which they kept secret until they could lock it down on patents, then used their patents both to monopolize the U.S. market and to prevent innovation for nearly 20 years. This is discussed in Shulman [2003]. The role that Marconi and his patent played in the development of the radio is altogether similar – see Hong [2001] – as are innumerable others. At the opposite extreme we have, again among many, the example of the Cornish steam engine discussed in Nuvolari [2004a, b]. Here engineers exchanged nonpatented ideas for decades in a collaborative effort to improve efficiency. The modern and highly successful open source software movement is a more contemporary example of how collaboration and exchange of ideas thrives absent intellectual property. How much public benefit of the various patented – and never-the-less secret – pieces of the Microsoft operating system has occurred?