Patents have the same economic calculation problem as prizes, but they’re worse

With patents, the central authority need not attempt to calculate the economic value of an invention, because the market will aggregate everyone’s demand for said invention and award the inventor proportionally. Since patents don’t have to choose a goal to incentivize ahead of time, they also promote investment in a wide range of inventions, even those that almost no one has thought of or those that most people think are useless.

What Smith leaves out is that governments still must proportion the reward from patents to the merit of the invention by choosing how long they are protected for. If 14 year patents are good, would 15, 50, or 5 year patents be better? In the US, design patents still get 14 years but the most common type, utility patents, get 20. There are exceptions for pharmaceutical products and the majority of newly issued patents receive some sort of extension over the 20 year mark. Additionally, although patents are more flexible than some targeted prizes, like the Royal Society’s prize for a method of calculating longitude at sea, prize funds can easily be open to an unspecified range of entries like the Macarthur Genius Grants, which have rewarded select researchers from poetry to physics with a million dollars for over 30 years.

So in practice patents are subject to the same economic calculation problems as prizes, and they have more severe consequences for getting it wrong. Now the question becomes how best to allocate budgets between funding scientific prizes and other public goods, and how to allocate prizes among scientists and inventors.