It’s hardly surprising that America – the land of Thomas Edison, Graham Alexander Bell, and Steve Jobs – is a vigorous defender of inventors’ rights. President Trump has turned up the heat on the long-standing concerns about intellectual property ‘theft’ by foreigners, especially China:

The theft of intellectual property by foreign countries costs our nation millions of jobs and billions and billions of dollars each and every year.

He commissioned the US Trade Representative to report on this, published here.

Much of the commentary on this topic seems to accept that America is well justified in its complaints: inventors have a right to be rewarded for their innovation, don’t they?

As usual, it’s more complicated than that. The short answer is: “it depends”. Society benefits from innovation, so invention should be encouraged, which means that innovators should be rewarded. But our present system of intellectual (IP) rights gives the reward (and the incentive for further innovation) in an inefficient way – by giving the IP owner a monopoly. Monopolies are inefficient – they restrict production, make excess profits, and may not foster further innovation.

The issue here is the nature of innovation. Isaac Newton said: “if I have seen further, it is through standing on the shoulders of giants”. The main source of innovation is the incremental improvements that are made when an existing invention is opened up to competition.

The main source of innovation is the incremental improvements that are made when an existing invention is opened up to competition.

The best example here is the steam engine. Boulton and Watt registered the early patent. The engine improved very little during the duration of the patent because they had little incentive to innovate. When it expired, there were huge improvements in efficiency, many by Boulton and Watt themselves.

The image of the lonely inventor having the “eureka” moment is a misunderstanding of how most innovation works. Almost all the post-Second-World-War breakthroughs in basic innovation were made in the government sector, often military-related. All 12 of the basic technologies which are incorporated in the iPhone were the product of government research. The US Defense Advanced Research Projects Agency (DARPA), defence contractors, and university researchers funded by the government did most of the basic research. Australia’s government-funded CSIRO deserves a mention here for its role in the development of WiFi.

Typically, basic research has been funded by governments and commercialised by private-sector innovators such as Steve Jobs at Apple or Sergey Brin and Larry Page at Google (who took their start from a DARPA project). Non-stick frying pans also deserve a mention – a byproduct of NASA’s moon adventure. But more substantial examples abound. One is the internet – a government-sponsored invention that provided huge opportunities for the private sector to commercialise. Next time you check Google maps, thank the US government for putting up the GPS satellites, freely available to innovators of all kinds.

Countries with substantial ownership of IP (and strong vested interests) such as the US have an interest in maximising the duration of patents. The “Mickey Mouse Act” is always quoted in this context, giving Disney’s comic-book characters 70 years of protection after founder Walt Disney’s death. But there are many more-consequential examples of excessive protections. The key point here is that long-term protection does little to foster innovation because the value of far-distant profits is heavily discounted. But the damage to innovation can be great.

On top of this, the price-gouging behaviour of some IP owners has been reprehensible. Pharmaceutical companies “ever-green” patents by making small variations to drugs when patents are about to expire. These companies operate in an environment distorted by government subsidies and insurance, with little market-imposed discipline.

There are other ways of promoting innovation.

There is some relevant history here, from the period when America was at the same stage as China is now. In the 19th century, the US was catching up to the then-dominant power, Britain. Americans were avid readers of Charles Dickens but paid no author royalties because US copyright applied only to domestic authors. Similarly, America’s early textile industry relied on British technology, freely taken.

There are other ways of promoting innovation. The thought-provoking 18th century example is the prize offered for measurement of longitude, won by the Harrison clocks now at Greenwich. In this model, the objective is identified, a reward is offered, and, when the ingenuity of inventors identifies the solution, the idea is available freely to everyone.

So where does this leave Trump’s complaints? Any successful protection of IP must recognise three things. First, “ideas want to be free”, in both senses of the word “free”. Second, governments always play a key role, so criticism based on the role of the Chinese government may be misplaced. Tech companies might keep this in mind as they minimise their company tax. Third, society’s principal aim should be to encourage innovation. With patents, monopolies are created but the aim should be to minimise inefficiency, which means parsimonious protection of IP. And the rules need to be tailored to enhance competition and further innovation, not inhibit it.

Experienced foreign investors in China understand that they are not operating in a free-market environment and are outside their own legal jurisdiction. Their production technologies will inevitably “leak” soon enough. But investors in China should accept that they are not in Kansas anymore. Otherwise, they should stay home.

What about governments, trying to protect security-sensitive technology? This is not about IP rules. This is about keeping secrets, not encouraging the disseminating of useful ideas and encouraging innovation. That’s a very different story.