Economic Rationale

There are four primary justifications for granting patents: disclosure, innovation, production investment, and designing around.

First, in accordance with the original definition of the term "patent," it is argued that patents facilitate and encourage disclosure of innovations into the public domain for the common good. If inventors did not have the legal protection of patents, they might prefer or tend to keep their inventions secret. Awarding patents generally makes the details of new technology publicly available, for exploitation by anyone after patent protection ends, or for further improvement by other inventors. Furthermore, when a patent's term has expired, the public record ensures that the patentee's idea is not lost to humanity.

Second, it is broadly believed that patents provide incentives for economically efficient research and development (R&D). Many large modern corporations have annual R&D budgets of hundreds of millions or even billions of dollars. Without patent protection, R&D spending would be significantly less or eliminated altogether, limiting the possibility of technological advances or breakthroughs. Corporations would be much more conservative about the R&D investments they made, as third parties would be free to exploit any developments. This second justification is closely related to the basic idea underlying traditional property rights: why build a house if another person could freely occupy it?

Third, in many industries (especially those with high fixed costs and either low marginal costs or low reverse engineering costs - computer processors, software, and pharmaceuticals being prototypical examples), once an invention exists, the cost of commercialization (testing, tooling up a factory, developing a market, etc.) is far more than the initial conception cost. (For example, the "rule of thumb" for computer companies in the 1980's was that post-R&D costs were 7-to-1). Unless there is some way to prevent copies from competing at the marginal cost of production, companies will not make that productization investment.

Fourth, many believe that patent rights create an incentive for companies to develop workarounds to patented inventions, thereby creating improved or alternative technologies that might not otherwise have been developed.

One interesting side effect of modern day patent usage is that the small-time inventor can use the exclusive right status to become a licensor. This allows the inventor to accumulate capital quickly from licensing the invention and may allow rapid innovation to occur because he/she may choose to not manage a manufacturing buildup for the invention. Thus the inventor's time and energy can be spent on pure innovation, allowing others to concentrate on manufacturability.