Tesla Shock: A Company Favors Competition
You want evidence that the old-world system of top-down command and control is breaking down? Look no further than Elon Musk’s statement on behalf of the revolutionary company Tesla Motors.
Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology…. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.
When I started out with my first company, Zip2, I thought patents were a good thing and worked hard to obtain them. And maybe they were good long ago, but too often these days they serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors. After Zip2, when I realized that receiving a patent really just meant that you bought a lottery ticket to a lawsuit, I avoided them whenever possible.
What? Has Musk become a communist? Far from it. He has realized that he is better off competing than holding pieces of paper from the government that threaten anyone who emulates the company’s technology.
In other words, he has decided to try capitalism, which, contrary to the widespread view, has nothing to do with patents. The free market is truly free just like speech. If your product is out there, anyone should be free to reverse engineer its features and compete.
This is how fashion works. This is how the food industry works. This is how the market works. No one is obligated to give away company secrets. But if a competitor is clever enough to figure out how to observe and then copy the best you have to offer, bully for them.
As he explains in his announcement, no one ever made a buck solely by clinging to a patent. Defending the patent against piracy is a hugely costly undertaking and always has been. For a company to be really successful, it has to do more than copy what some other company is already doing. It has to innovate. That innovation inspires the entrenched company to improve its product and reduce its price.
A patent holder is attempting to protect itself from natural market forces.
Does free-market competition sound rather difficult? Does it sound like it might be hard to hold on to profitability without a government grant of privilege? Indeed. Welcome to the bracing waters of the market where consumers, not producers, rule the day. Real capitalism is an ongoing conspiracy to reduce the profits of the biggest market players to zero.
For a very long time, even hundreds of years, people have been confused about patents. They began as a government grant of monopoly privilege to favored companies, the very embodiment of mercantilism. The old liberals of the 18th century, true proponents of markets, opposed them. But over time, they came to be re-christened as the very spirit of capitalism itself.
It did the reputation of capitalism no favors, as people came to associate markets with powerful and wealthy holders of special privileges. Ironically, they were, and are. This makes people mad, and contributes to the image of markets as some hidden form of despotism.
It further creates the sense that the scarcities that commerce operates to overcome are entirely artificial, a creation of the law. This is absolutely untrue for most all things but it is actually the case that patents create scarcities out of information that would otherwise belong to all by the very nature of the commercial marketplace.
Markets rely on imitation. No one company can actually innovate something completely out of nothing. The history of economic development occurs in marginal steps, as one entrepreneur learns from and emulates another company, in successive rounds toward an ever evolving progress. Profits serve as signals to others: these people know what they are doing; go and do likewise. Patents interfere in this process and forcibly slow down industrial development.
In the case of Tesla, its patents were acquired defensively. In other words, the company didn’t want to come out with great innovations without patents and face the prospect that some other competitor would use the state to prohibit its production processes. In this way, patents create a moral hazard. They tend to draw companies into the corrupt orbit of state regulation and divert their attention away from the business of commerce.
Even if every patent holder would be happy to give them up, it’s the system that prevents it from happening. It’s like mutually assured destruction. You have to hold weapons or else you get blown away.
Tesla only took this radical step because they came to realize that they actually didn’t face a serious threat from the competition. The U.S. car industry is so completely enveloped in the regulatory maze and haze that they are stuck on a certain trajectory, making innovations in electric cars mainly because of federal mandates. That gives Tesla the field pretty much alone.
Given this situation, Tesla took a brave and wonderful step in the direction of embracing free market business practices. By “giving its patents away,” what it really means is that it is going to decline to use coercion to stop imitation. People have called this choice altruistic. Doubtful. It’s just wise. Consider how much the company will save without having to fuss with all the nonsense.
No company ever became profitable due to the patents it holds. Nearly all granted patents amount to nothing. They don’t cause good products to come into being. They don’t cause consumer purchases. They don’t cause profits to happen. Only good business brings that about.
Despite all the corruption, all the cost, all the diverted energy, there remains very little prospect for patent reform coming from the U.S. Congress. In this case, industry is going to have to reform itself. We need thousands of more Teslas to happen before we see our monopolistic system of industrial privilege and graft replaced by peaceful market forces.
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