Patents are better at preventing monopolies than the CP.

Economic studies of innovation further assume that the legal monopoly accorded to patented ideas leads to monopoly in the market. Simple textbook models posit that monopolies create higher prices and lower output, which results in net social costs or “deadweight losses.” The unexamined assumption that underlies this argument is that the alternative to the monopoly is a more efficient competitive system. This sort of reasoning leads to the conclusion that incentives like innovation prizes are necessarily socially desirable because they avoid deadweight losses. By contrast, this book emphasizes that all institutional arrangements have both costs and benefits that need to be explicitly addressed. Far from being competitive, administered innovation systems typically involve monopsonies, or situations where a single buyer faces numerous potential applicants. Monetary prizes involve fixed returns/prices offered by a sole buyer, where adjustments are limited to one side of the market (variation in the number of applicants for the award). Standard economic analysis of monopsonies suggests the likelihood of a misallocation of resources. Such systems can generate serious efficiency concerns, including the potential for unjust discrimination and rent-seeking, which the historical evidence presented in these pages suggests likely outweigh the costs of market-oriented patents for invention.

Free markets adjust to disequilibria through changes in prices and profits, so firms and their agents internalize the costs and benefits of their decisions. Administered systems, by contrast, generally involve a separation between those who make the decisions and those who suffer the consequences of failure. A crucial feature is that no third-party mechanisms, such as a legal right of appeal, are put in place to ensure that arbitrary or unjust decisions are censured or overturned. The Fields Prize in mathematics, for instance, is overseen by a committee whose decisions are sealed for seventy-five years, and its awards at times reflected the personal agendas of the members of the committees, rather than the objective achievements of the candidates.41 Thus, unlike market transactions where participants are (directly or indirectly) disciplined by the costs of incorrect choices and of failures, in administered systems there are fewer incentives or impulses to ensure efficient decision-making even in the long term.