The Role of Patents in Monopolies

One of the lesser-known reasons behind M&A and consolidation of markets (aka less competition) is the role of patents. Even if a small company has great ideas, at some point, to get access to the broader market, they will need licenses. Over time, the cost of such licenses may become prohibitive, encouraging consolidation. This is why open source is so important, but it's also why governments have lost credibility over time.

Rather than address the causes of needlessly prohibitive barriers, governments have attempted to deal only with the results of an increasingly unwieldy legal framework, which merely adds to its complexity--and which generates even more contempt for the elites who benefit from it. 

Let's take a couple of recent examples: Uber/Waymo and Fitbit/Jawbone. They've sued each other, a process that is supposed to create a check and balance protecting innovation. Problematically, it's impossible to know whether any party actually committed legal violations or trade secret theft without each side spending millions of dollars in legal fees that do nothing to promote innovation. In some cases, companies have spent hundreds of thousands of dollars arguing about superficial similarities in mobile phone design, down to the curves and grooves in a mobile phone's case (e.g., Apple vs. Samsung). 

If you are a small company threatening the market share of a larger company, the larger company has an asymmetrical payoff in suing you early and often--even if its case has little merit. The smaller company then has to raise funding for non-innovative purposes or become more dependent on outsiders to survive. As such, the status quo biases winners and losers based on which innovators have access to the best or most powerful venture capitalists and lawyers, many of whom are connected to the existing political establishment, especially in states where judges run for election. 

Worse, governments cannot unilaterally reform the patent development or certification process, partly because the procedures are often based on subjective interpretation and therefore the random assignment of a particular government employee. (e.g., is Amazon's "one-click" technology truly deserving of a patent? If so, which parts?) 

Meanwhile, laws and regulations relating to interpretation continue to expand to resolve increasingly complex or new issues, frustrating even sincere government employees who may not have recent technological expertise or who may be receiving such expertise secondhand from biased experts. Absent wholesale removal of patent application screeners who disagree with the executive branch's interpretation of truly non-innovative or innovative patents--a definition that may change every four years--lawyers once again take the helm. Compounding problems, as law school tuition has increased, legal fees have risen, making experienced (and even inexperienced) lawyers less accessible for smaller companies.

Conclusion: every system of any kind, once it achieves stability (often misconstrued for success), has three choices: bar newcomers, which increases social tension, reduces consumer choice, and renders diversity impossible; make competition outside the established system affordable and feasible, which often increases segregation while creating more entrenched interests; or adapt and suffer sacrifice. The primary cause of almost all problems in the developed world today is the inability of all parties--both public and private--to choose the third option.

Bonus: from Peter Thiel's From Zero to One: 

Bonus II: Much of globalization's discontents is merely new or freshly made capital moving from developed countries (that have not chosen to adequately reform existing legal systems) and into developing countries which lack similar barriers--exactly as one would expect new capital to behave in a rigged system.

Bonus III: Peter Thiel's ideas are not entirely new. See Elliott Sclar's words from 2001. 

A Primer on Modern History

The study of modern history is needlessly complicated. Unfortunately, most history teachers and professors spent their lives in a few countries or studied only a single subject, rendering them unable to provide the context students so desperately need. I have tried below to provide a straightforward framework acceptable to everyone. Without such a framework, historical understanding will fracture, and humanity will continue to repeat the same mistakes.

Since 1945, every single government and military has been focused on attaining or preventing others from attaining nuclear weapons. After the United States dropped bombs on Hiroshima and Nagasaki, ending WWII, politicians and military leaders realized existing defense/protection paradigms no longer applied. A country with the most skilled troops, superior munitions, most efficient supply chains, best hygiene (to prevent disease, which often killed more soldiers than active combat), and even superior strategy would not necessarily prevail. Now, only three things mattered: technology and the ability and willingness to use it. Developing brawn had given way to developing brains and gaining (accurate) information.

Military budgets prioritized R&D and began to emphasize covert operations. As governments continued competing for the moral high ground, questions became more complex. When was a first strike politically acceptable? How could one determine whether a recruit would keep secrets? How could countries identify the best minds in the world and entice them to relocate? (e.g., Operation Paperclip) 

Such a shift required a mix of intrigue, psychology, persuasion, media influence, and propaganda. Intelligence communities realized they would be key players in the new paradigm and, in an era prior to CCTVs and ubiquitous technological surveillance, reliable human assets and agents would be the difference between victory and defeat. Furthermore, where soft power and persuasion would not work, assassinations and abductions would--preferably through a third party ally. [Evidence: Operation Damocles; Anwar al-Awlaki and his 16 years-old son; Israel assassinating Iranian nuclear scientists Masoud Alimohammadi, Majid Shahriar, Darioush Rezaeinejad, Mostafa Ahmadi Roshan, and possibly Ardeshir Hassanpour, mimicking USA's strategy against Germany.] 

Such tactics were not enough for military and intelligence units, which also resorted to false flag operations or coups on a much wider scale. [e.g., Gulf of Tonkin, Lavon Affair/Operation Susannah, Operation Ajax (1953), Operation Musketeer (1956)] Facing potential conflicts between civilian and military objectives, democratic regimes sought to limit international interference with domestic governance, causing ideological splits regarding the balance of law, order, and dissent. As domestic resistance increased, it had the potential to upend military alliances post-WWII, which involved important economic treaties and investments. (See “most favored nation” clause, which used USA's stronger currency to tilt trade in its favor: “The American workman, by 1960, had the highest standard of living in the world, and all due to what they genteelly called ‘the most favored nation’ clause in every commercial transaction with the East.” – Philip K. Dick) 

The failure of Western governments to foresee strong domestic resistance to international policies led to more secrecy in the name of national security, both at home and abroad. The private security industry, not subject to invasive government oversight, began its ascent. British-based Securicor is one example. In 1953, it specialized in delivery and logistics, eventually making its way into the telecom (aka surveillance and data-gathering) business. Today, it is part of G4S, the world's largest security company. With 585,000 employees, G4S is the world's third largest private sector employer and the largest in Europe and Africa. (See the film Logan (2017) for a dystopian view of the possible evolution of private security firms.) 

Returning to the 1960s, covert operations and violations of territorial sovereignty (Operation Menu) became more accepted within governments as the United States began to realize its superior armaments were not enough in Vietnam. As nuclear energy and more lethal weapons accelerated the risks of being outside established alliances, countries and military leaders were forced into one of two camps: pro-Soviet Union (which in practice often meant pro-China) and pro-American. Meanwhile, existing and aspiring world leaders learned that favorable (or in the case of Vietnam, unfavorable) media coverage and asymmetrical warfare—later used by Osama bin Laden—could defeat larger powers or at least convince them to leave. Like private security firms, the general media industries--in this case, television and radio--began their steady ascent. 

Its ability to influence world affairs now jeopardized by increasing Chinese and Soviet influence in Asia and Eastern Europe as well as domestic turmoil, America began addressing matters under its direct control more forcefully. American police started using the same tactics as the military and intelligence communities on their own people. (Potential lesson: once the military uses a particular strategy successfully, it is only a matter of time before the civilian government deploys similar strategies.) 

Surveillance, infiltration, and financially-debilitating lawsuits were used against antiwar groups and activists from MLK to Muhammad Ali to John Lennon. The term “law and order” became a justification for a proxy war against protesters, later morphing into President Reagan’s "War on Drugs." Ironically, countervailing forces that bolstered social change came partly from the military, which had relied on greater female participation in the private workforce during wartime as well as soldiers of color, including but not limited to Jackie Robinson. 

Politicians like America's Joseph McCarthy had used the media to blacklist anyone deemed an adversarial nonconformist in the 1950s at the same time the Soviet Union and its satellite forces were blacklisting and jailing dissidents.As power-hungry politicians gained more power, propaganda against dissenters became more widespread, with police officers in some jurisdictions ordered to attack nonviolent protestors while federal agencies (J. Edgar Hoover) spied on civil rights leaders. As lines between international and domestic operations blurred, the Watergate scandal was a natural and inevitable result. (See The Most Dangerous Man in America (2009).) 

Were it not for the courageous work of American whistleblowers and journalists (e.g., All the President’s Men (1976)), who often ignored conservative legal advice from their employers, secretive operations would have continued without abatement. Unfortunately, civilian resistance movements against the Eastern Establishment were not as strong as ones in the West, thus preserving the East's status quo--a status quo that would later prove to be unsustainable, essentially bankrupting the Soviet Union and ending its petro-military-industrial economic model. 

In the West, where the status quo was fraying, greater diversity flourished, both strengthening and weakening authoritarian impulses. Taking advantage of distractions in Southeast Asia and Central/South America, some countries decided to cooperate outside U.S. or Soviet-led alliances, much in the same way China would later exploit America’s failure to “pivot to Asia” after the costly and counterproductive 2003 Iraq War. [Examples: creation of ASEAN in 1967; “mid-level” countries like Argentina and Iran working to resume nuclear cooperation, only to see outside events interfere with their relationships, such as the Buenos Aires 1992 embassy bombing, in which neither Argentina nor Iran strangely derived any benefit.]

In 1973, the OPEC embargo added yet another disruptor to the existing world order, namely the integrity of the oil supply chain, which formed the underlying basis of U.S. dollar strength and numerous economic treaties. Post-Nixon and the cessation of active armed conflict between West and East, economic statecraft became the way forward, with America’s mighty Navy and more developed financial markets giving the West a clear advantage. Trade, oil, weapons development, and continued control of nuclear energy would dominate international relations until the birth of the internet in the 1990s. The formal dissolution of the Soviet Union on December 26, 1991 provided America with the opportunity to create what President George Bush, formerly the CIA's Director, called a “new world order” on September 11, 1990, a period lasting until September 11, 2001. America's 2003 invasion of Iraq, driven by falsified pretenses, shattered America's reputation, allowing other countries to vie for global dominance. And here we are. 

© Matthew Mehdi Rafat (2017)

Bonus: another historical pattern is that when two countries enter into a treaty—whether to avoid war or after a conflict—often only one party intends on upholding the terms. The other party uses the break in tensions to disarm—both literally and figuratively—the other signatory, eventually invading the former enemy and prevailing through political chicanery.

Bonus: when we hear the term, "divide and conquer," we typically understand the term absent historical context. After WWII, the British, despite prevailing, were in debt and could not maintain their empire, which once spanned a quarter of the globe. They attempted to break up or partition several areas in order to more easily manage them and to allow Western powers to maintain naval supremacy. Singapore's break from Malaysia is one example--keep the port, leave the land. Divide and conquer. Yet, even with lesser security obligations, European powers, particularly the British and the French, could not afford empire status. By the time of the Vietnam War, Europe had effectively handed off empire duties and corresponding security--both for Westerners living abroad as well as Western-owned businesses--to the United States. 

Bonus: from Allison J. Truitt's Dreaming of Money in Ho Chi Minh City (2013): "The United States' massive military expenditures in Southeast Asia led to the collapse of its ability to maintain the dollar's fixed value relative to gold. When the US government put an end to the dollar's convertibility in 1971, it ushered in a new era of more flexible and more volatile exchange rates." 

Bonus: counterpoint from Singapore's Kishore Mahbubani's Has the West Lost It? (2018)

Bonus: if you enjoyed this post, you may also like this one: Ports, Finance, Power, and Free Trade. 

Bonus: "History... is not merely something to be read... On the contrary, the great force of history comes from the fact that we carry it within us, are unconsciously controlled by it in many ways, and history is literally present in all that we do.  It could scarcely be otherwise, since it is to history that we owe our frames of reference, our identities, and our aspirations." -- James Baldwin, USA (1965)