Marginal Utility

by Tom Bozzo

One of my grad school advisers would say that he wanted any fancy economic theorizing to be articulable, at some level, as an equation of marginal benefits and marginal costs, or else it wasn't really economics. In other words, if a social science problem isn't reasonably modeled as (constrained) optimization, it properly belongs to another social science. That's arguably a bit restrictive, but not obviously worse than making economics the mother of all social sciences by casting every decision as an economic decision.

A slightly different concept of economics (that not beholden to, though also not orthogonal to marginalism) is as the social science that studies how people respond to incentives, especially pecuniary incentives. And, at lunch with non-economist Jeremy Freese a few days ago, he was saying how he found the idea of alignment of incentives to be an economic concept he was finding Really Useful. (*)

As with many Really Useful Concepts, alignment of incentives is an idea that's totally obvious in a simple statement, yet thousands of careers are launched fixing (or exploiting) the rampant screw-ups that follow from failure to align incentives. Here's the idea in a nutshell: If you want people to do A, make sure their (usually financial) incentives are to do A. Or, if people should be doing A but aren't, a detailed examination will show that their incentives are leading them to not-A. Again, it's just shocking how often policymakers forget (if not willfully violate) the principle.

I would submit that the patent system mess, the subject of a lot of blogopsheric and mass media commentary over the last couple weeks, is best understood as an epic case of incentive misalignment in the granting process. Good reading is "The Monopoly Factory," an excellent Washington Monthly article from last year by Zachary Roth. While the incentive-alignment meat doesn't begin until about halfway through the article, Roth convincingly argues that the Patent and Trademark Office is operating with incentive structures — via its funding method, the result of what is likely to be regarded by economic history as a seriously misguided effort to take the costs of USPTO off the backs of taxpayers, and the approach to evaluating the performance of individual patent examiners; patent litigation "reforms" are an additional complication — that are all but guaranteed to promote the approval of patents with attenuated social value.

It follows that efforts to solve the problems of "patent trolls" by restricting the rights of certain patent holders — make sure you're sitting down before I note that anti-trolling reforms would particularly benefit large corporations, some of which have questionable trolling histories of their own — at best would treat a symptom. If one were to ask, as here at Conglomerate, whether the patent system should be organized to limit the rights of non-practicing patent holders, the short answer is probably not; doing so would ostensibly limit the monopoly profit incentive to the subset of innovations that have immediate commercial prospects, which are arguably less in need of patents to come to fruition. It would be better to attack the problem at the source, which is to say by making the USPTO a stingier maker of monopolies.

It would be over-romanticizing to sugges that the main victims would be prescient individuals working in their garages (or attics, as the case may be); it seems more likely — depending, of course, on the details of any reform — that outfits like the Wisconsin Alumni Research Foundation would take the collateral damage.


(Full disclosure: While my primary area of expertise is postal economics, my employer has a patent litgation support practice in which I occasionally consult.)


(*) At this point, I resisted the temptation to pull a hood over my head and say something to the effect of, "Excellent — your journey to the Dark Side is nearly complete."