In formulating a political/legal theory for the free society, one of the most crucial questions to be solved is that of property rights in innovation. This amounts in practice to the question of patents and copyrights. Past and present patent laws have been dismal failures in protecting the rights of inventors; writers have been somewhat better served by copyrights, but the recent rise of cheap duplicating methods has begun to create problems in this sphere also. In general, governments have regarded patents—and innovation itself—as a necessary evil and written laws accordingly.
Libertarians have been severely critical of existing patent systems (although apparently fairly satisfied with copyright laws) but unable to agree on the structure of the correct system. The conflict tends to reflect the schism between the supporters of "limited constitutional government" and the "rational anarchist" school. However, in the patent question (as perhaps in other aspects of this debate) the conflict between these two schools of thought seems to be caused more by differences in attitude than by differences in principle.
The basic aspects of the "limited constitutionalist" position have been very ably set out by Rand. Although criticizing the present U.S. patent system, Miss Rand would apparently not change it very much, at least in fundamental aspects. Thus she advocates retaining: 1) award of exclusive patent to the first to invent; 2) a definite time limit on the length of a patent, after which the invention passes into the "public domain."
The "rational anarchist" school takes a completely different position. Rothbard's proposals may be taken as representative: 1) a patent should be awarded to each independent inventor; 2) patents would be granted in perpetuity and transferable to the inventor's heirs. Rothbard advocates a very weak sort of patent; in fact he does not call it a patent, but a copyright, although it is apparently to be even weaker than present copyright laws. To strengthen the protection of the inventor, Skye D'Aureous has implicitly extended the Rothbard position by proposing an auxiliary system  which amounts to avoiding the necessity of a patent by systematic use of industrial secrecy.
Both these schools of thought, however, are in error, and both have in fact committed the same error. Let us see how this error arises by examining in detail the reasoning that they have in common.
PROPERTY AND CREATION
It is well-known that the ultimate source of all property is creation; so far, so good. Now, say both schools, the innovator creates an idea; therefore he owns it. The basic source of disagreement now appears. The problem arises because ideas are not the same as material goods.
Suppose I build a chair; it is mine because I made it. If you build a chair, that chair is yours because you made it. There is no interference between our property rights because there are two different chairs; you own yours, and I own mine. But now suppose we are inventors. I have an idea; it is mine because I created it. You have the same idea independently. Now there appears to be a conflict of property rights. Who owns the idea? This problem can never arise with material goods; if I make a chair, you cannot independently make the same chair.
How should this conflict be resolved? Both schools take their cue from analogy with material goods. Thus Rand says, in effect: "Suppose two prospectors survey the same plot of land and both find gold. Even though both made their discovery independently, the resulting material good, the gold mine, is awarded to the first discoverer. The same should be done with ideas."
Rothbard, on the other hand, apparently reasons as follows: "The second inventor can be denied property rights only if he in some way stole something from the first inventor. But what has he stolen? True, his independent manufacture of the invention will cut down the first inventor's profits, but this is irrelevant. If I am a chair manufacturer, the entry of a competitor into the chair market will cut down my profits, but I am not thereby entitled to prohibit him from doing so."
One can spend a great deal of time arguing the relative merits of these two positions. All such argument, however, is pointless; both arguments are incorrect because they both use "idea" as a floating abstraction. That is, the terms "idea," "innovation," "invention," etc., as used by both Rand and Rothbard, are terms which have no referent in reality. This is the fundamental error.
Both arguments use these terms in such a way as to make clear the authors' convictions that an idea or innovation is an independent (though of course intangible) entity which can be an economic good, which can be bought, sold, rented, etc.. While I do not want to claim here that only tangible entities can be economic goods, it is not hard to see that ideas cannot be.
THE REAL IDEA
What is an idea? Suppose all the minds in the universe were suddenly to disappear; would there still be ideas? No; when one speaks of ideas, one is speaking of concepts (specifically new concepts) and concepts cannot exist independent of the mind. ATLAS SHRUGGED would be merely 584 dirty pieces of paper—if there were no minds to read and understand it. Thus there is no such thing as an "idea" just floating around in the void; every idea exists in somebody's mind.
This is why ideas cannot be economic goods; they are not transferable. Consider the following example: C, a chemist, has invented a new drug. M, a manufacturer, plans to buy the invention (not a sample of the drug, mind you, but the invention, the idea). M hands over the money, and C gives him a diagram of the drug's structure and a detailed description of its synthesis. M, being a layman, can make nothing out of it. Has the idea in fact been sold? No; it has not been transferred to M, in spite of the fact that all of the "data" has been "given" to him. The problem is that human beings are volitional, and they have to do their own thinking. The idea cannot be punched up on IBM cards and read into M's skull—he must think of it himself. C may be able to help him to do so, but he cannot in any way give M the idea. The idea, in short, cannot get into M's mind by transfer—it can get there only by being created by M.
(A word should be said about the theory that patents protect property rights in "data" or "information," where "information" is used in its engineering sense. Essentially the same objections apply here. First, information, like its opposite entropy, is only a mathematical abstraction with no referent in reality. Second, information as such is not an object of human action; people act to obtain knowledge but not bits.)
What, then, of the ownership of ideas? Very simple: I own the ideas in my mind; you own the ideas in yours; I created mine; you created yours. Is there any conflict? No; my ideas exist only in my mind and can never be anywhere else; they can be neither sold nor stolen. Thus there are property rights in ideas, but they are property only in the trivial sense; since they can never be transferred and can never be economic goods, ideas, cannot be part of economic transaction and hence their property status is irrelevant.
This does not mean that an inventor could never be paid for his achievement. The inventor cannot demand payment for his idea, but teaching that idea to somebody else is a service, for which he is entitled to payment. In addition, as we will see below, he is entitled to receive other payments. It is important to note, however, that the distinguishing characteristic of the inventor is not that he had the idea but that he had it independently, that is, that nobody else taught him.
Let us go back, now, and see how the nature of patents should be derived. We find that we can describe a patent in terms of three contracts: the disclosure contract, the certification contract, and the production contract.
The disclosure contract amounts to a copyright. When the inventor publishes the details of his invention—i.e., discloses it—he is teaching his idea to other people, and, as we have seen, he is entitled to payment for that service. In particular, he is entitled to place conditions on the use of the idea by any person to whom he has taught it. Not surprisingly, it is found that most inventors wish to make it a condition of disclosure that they retain the exclusive right to market their invention. This is the disclosure contract: a contract between the inventor and the people to whom he teaches his idea, in which the latter agree in payment for that teaching to concede all rights to economic development of the idea to the inventor.
The certification contract is an agreement between the inventor and the State. In return for the payment of a fee by the inventor, the State agrees to certify (after investigation) that his conception of the idea was indeed independent.
The production contract is a little more complex. Let us return for a moment to the origin of property. Ownership is derived from creation. Once we leave "Crusoe" economics, however, most creation is joint, that is, two or more people participate in the creation of the finished good, and all of them have a claim on ownership of that good. These claims are settled by contractual agreement, made in advance, by the producing parties. One of the most common forms of joint production occurs when one person—the inventor—develops an idea and another person or persons translate the idea into material goods. The purpose of a patent is to insure payment to the inventor for his part in this joint production. As it usually happens, rather than deal with the complexities of joint ownership, the inventor and manufacturer agree that the product will be totally owned by the manufacturer but that a payment will be made by him to the inventor, called a royalty.
There is a very important point which should be noted here. Most authors have considered an idea or innovation as a good which the inventor has produced and a patent as a certification of his property rights in that good. However, as demonstrated above, an idea cannot be a good. Instead, the inventor is paid for his labor; a patent is a certification of his having done that labor. Thus, ultimately the inventor is paid for his labor in performing two services: the service of making the invention and the service of teaching his idea to others.
Another point which arises concerns the question of certification. Under present U.S. patent law, an inventor must take steps to patent his invention within one year of the first date on which the invention has been publicly used or its nature published. In a free society, the State could not require that a person pay for certification of his rights as condition of protecting them (although it can, of course, demand payment for the protection). Thus the State would have to grant a patent regardless of previous use of the invention, as long as the inventor could show independent invention. It should be noted, however, that the inventor would in any case have to demonstrate that he had publicly stated his disclosure conditions. In any case, this question would be of little practical importance, since certification of the invention makes protection of the inventor's rights much easier not only for the State but for the inventor.
Before going into some specific questions in patent theory, it should be pointed out that previous writers on this subject have not sufficiently realized the extent and importance of the contractual nature of patents. The exact nature of the three contracts described above, which together make up a total patent, cannot be completely prescribed in advance; in a free society, no doubt a number of different types of patent agreements would be used.
The question now arises: What sort of idea is patentable? Rand goes into this question in some detail, but, although her conclusion is essentially correct, there are several flaws in her reasoning. Thus Rand claims correctly that a discovery (as opposed to an invention) cannot be patented, because a discovery cannot be property, whereas an invention can.
A scientific or philosophical discovery…cannot be the exclusive property of the discoverer because: (a) he did not create it, and (b) if he cares to make his discovery public, claiming it to be true, he cannot demand that men continue to pursue or practice falsehoods except by his permission.
There are three errors here: 1) as we have seen above, no idea, whether invention or discovery, can be owned; 2) a discoverer does create his discovery—what he does not create is the fact of nature which his discovery identifies; 3) the distinction between discovery and invention needs to be somewhat more carefully defined than it is by Rand—if one discovers that a certain structure is capable of flight, he is also inventing the airplane.
The question of patentability involves several fundamental criteria. First: An innovator is not entitled to payment for any part of the production process in which he did not participate. This is merely a specific case of an obviously true general statement. Any laborer is entitled to payment only for the value which he has added to the finished product; once he has been paid, he is no longer entitled to anything more if somebody else then improves that final product.
Thus, consider the following situation: Suppose A invents the transistor. B, paying A's royalties, makes a batch of transistors and sells them to C, who uses them in the manufacture of transistor radios. C is not required to pay royalties to A, even though he is using transistors; he is not making transistors, he is making radios. The only production in which A has participated is the making of transistors. Now, consider a situation in which this principle is extended. D, a scientist, has discovered a scientific principle which was used in inventing the transistor. (We note in passing that there is no way for D to prove that A used his idea in making the invention; A might have been using an erroneous theory—as was the case in De Forrest's invention of the triode—or he might simply have hit on the transistor by accident. We are immediately suspicious; if there is, in principle, no way for D to prove that he has a right, surely he is in error in claiming that right.) Now we ask: Can D claim that he participated in the production of transistors? No—no more than A can claim that he participated in the production of the radios. Can D claim at least participation in the invention of the transistor? Not unless he actually collaborated with A in the invention, since D cannot claim either knowledge of or participation in A's mental processes. Just as A is fully paid when B pays his royalties, so D is fully paid when A pays D's fee (probably in the form of a copyright royalty) for teaching his discovery.
DISCOVERY AND INVENTION
Going back now to the distinction between a discovery and an invention: all inventions can be considered as discoveries; the crucial point which makes an invention is the inclusion of a use—the making of a good—in the idea. Thus if one observes that birds have a certain wing structure, that is a discovery; if one observes that that wing structure can be used to make an airplane, one has made an invention. Note, however, that one can claim only the consequences of the discovery that one has foreseen. In the example above, after a patent on airplane wings had been obtained, somebody else could patent the use of the discovery in, say, submarine rudders.
The question of priority and exclusivity is not very hard to deal with. Rand's position on this issue has been criticized elsewhere. An additional point might be made briefly here: there exist certain situations in which it is literally meaningless to ask which inventor was first. Using the above analysis, it is easy to see that Rothbard's position (though not his reasoning) is correct on this issue. Suppose that R makes an invention, which is then manufactured by S; T makes the same invention independently and has it manufactured by U. Is R entitled to payment from U? Obviously not; R did not participate in S and T's production. Thus, we conclude that patents should be awarded to both R and T. However, Rothbard errs in claiming that T must be given a patent unless R can prove that T's invention was not independent; it is incumbent on T to prove that his invention was independent—just as it was on R.
The length of term of a patent is the final question of importance to be considered. Without bothering to go into a specific, point-by-point critique of previous positions on this issue, let me just point out that all are led into oversimplification by the treating of ideas as goods. The length during which a patent as such is applicable is determined by the term of the disclosure contract; if the disclosure contract has expired, there is no further bar to manufacture of the invention by anyone who wishes. (However, a manufacturer who has made a production contract with the inventor is of course still held to the payment of the specified royalties, even though other manufacturers may now be making the invention for free.) Now, it is impossible to state in advance the exact terms of the disclosure contract; as pointed out above, in a free society one might well expect many forms to occur. (There are nonetheless certain limits on the nature of contracts permissible in a free society. For instance, a scientist, in publishing a discovery, cannot make it a condition of disclosure that further scientific developments based on his discovery be published only with his consent; in contrast to the case of a material good resulting from an invention, an idea resulting from the scientist's discovery cannot be his property. He cannot own or control the use of someone else's mind; this would be a type of "slave contract." ) An inventor would be allowed to make a disclosure contract which would apply in perpetuity and would specify that royalties be paid to his heirs after his death. There would be some mitigating factors, however. For one thing, if there were other, independent inventors who did not include such a clause in their disclosure contracts, it would of course tend to make any such specification useless. In addition, there might be some limitation imposed on the ability of the heirs to negotiate new production contracts, since they would not own anything (except insofar as rights under a contract can be "owned")—in particular they would not own the labor which the original inventor had done.
Something should be said about the economic consequences of patents. This subject has been left to the last since, of course, morality rather than economics is the deciding factor in political issues. However, since the moral is the practical, good morality makes for economic efficiency. What would be the consequences of the system outlined above, in contrast to those of present and other proposed systems?
One of the most aggravating features of the present U.S. patent system is the short term of its patents (17 years). It is not too uncommon for an inventor to be effectively denied a patent because, by the time he has cleared up challenges in court (which are frequent), developed the invention from the idea to the production stage, and completed negotiations with manufacturers, his patent has expired. A system in which patents were granted for life or longer would obviously increase the incentive to innovation tremendously.
The award of patents to all independent inventors would also have advantages over the present system. It is at present common for inefficient corporations to use a patent as a means of stifling further innovation in their field and thus retain an unjustified competitive advantage. The possible necessity of dealing with several inventors instead of just one would obviously inhibit the use of this policy. There is another factor. Under the present system, inventors work in the utmost secrecy, since a leak of their work could result in somebody else's claiming the invention and back-dating his record to establish priority. Under the Rothbard system, secrecy would still be the rule, since the first inventor must prove that a second inventor was not independent to keep him from getting a patent; keeping his own work secret would make such proof easier. Under a corrected system, however, an inventor would be eager to publish as much and as soon as possible, since he would thus make it much harder for other inventors to prove independence in court. Thus one could expect a substantial increase in the rate of technological innovation, which is seriously hindered by secrecy.
This essay constitutes only a bare outline of correct patent theory. A detailed legal study would of course be necessary to draft the specific laws for use in a free society, but unfortunately it does not seem that this will be necessary very soon.
Ronald E. Merrill is an MIT graduate in chemistry. He is now pursuing graduate studies at the University of Oregon.
NOTES AND REFERENCES
 Ayn Rand, CAPITALISM: THE UNKNOWN IDEAL, (New York: New American Library, 1967), pp. 130-34.
 Murray N. Rothbard, MAN, ECONOMY, AND STATE (New Jersey: Van Nostrand, 1962), pp. 652-60.
 Apparently one must actually buy a sample of the machine, etc., for Rothbard's "copyright" to come into force; but this may be only a misinterpretation caused by poor construction. See Rothbard, op. cit., p. 654.
 Skye D'Aureous, REASON, September 1970.
 One is always open to charges of misrepresentation when indulging in this sort of analysis, but it is sometimes necessary for clarity of argument to fill in the unstated assumptions and reasoning of other authors. Let me state for the record that I am not a spokesman for any of the writers discussed herein.
 This principle is accepted by both Rand and Rothbard; see the works cited.
 Rand considers ideas as a type of property which is, however, different from material goods but still transferable. Rothbard: "…a patent and a copyright…are both property rights in innovations." See the works cited.
 It has proven convenient for economic analysis to treat such intangibles as labor as economic goods. One could go back, however, and re-derive everything from a viewpoint which considers only tangible entities as goods.
 With brainwashing or drugs, ideas can be removed from a mind, but this constitutes intellectual "arson" rather than "theft."
 There are, of course, limits to the conditions which would be permissible. One of these is mentioned below.
 I do not wish here to go into the general question of anarchy. Those who prefer may substitute for "State" the term "protection agency," etc.
 C.D. Tuska, AN INTRODUCTION TO PATENTS (New York: Dover, 1964), p. 57.
 Not an idle example. The success of the Wright brothers was based mainly on careful measurements of the effectiveness of various wing types, using a wind tunnel, rather than on superior "inventive" ingenuity. See Fred C. Kelly, THE WRIGHT BROTHERS (New York: Ballantine, 1950), esp. pp. 45-49.
 Science Teaching Center, Massachusetts Institute of Technology, PHYSICS—A NEW INTRODUCTORY COURSE (Cambridge: M.I.T. Press, 1964), pp. 19-7 to 19-9.
 Rothbard, op. cit., p. 653.
 Rothbard, op. cit., p. 142, p. 438.