In my last post, I explained that the consequence of AI and automation is deflationary when the market is competitive, and we can fund UBI by printing new money without causing inflation. However, the natural workings of our current economy tend to result in technology monopolies. This is mainly due to two factors: comparative advantage from network effects and economies of scale, and the closed patent system.
When a new opportunity emerges and many startups chase the same opportunity, some will be more successful than others. Initially, this success may be due to better products and better technology. However, over time, the more successful companies will grow faster than the others, achieving larger scales. This gives the larger company an advantage because their cost is now lower due to economies of scale. Fixed costs, such as office rent and data centers, are spread across more customers, allowing them to offer products at a lower price.
For many internet businesses, such as social media or peer-to-peer platforms like Uber, Airbnb, and Turo, more people using the same platform simply makes the product better. No one wants to use social media that no one else is using, and you don’t want to use a ride-hailing app if there are no drivers on it. The larger platform always wins, and these markets usually end up with a monopoly or a duopoly, leaving no opportunities for small players.
In the case of AI products, the comparative advantage from economies of scale and network effects is even more apparent. The most successful AI companies will have access to the most GPUs, the most efficient data centers, and the lowest marginal costs. They will gather more data as more people use their services, allowing them to build even better and more intelligent AI products. This makes it extremely hard for other companies to compete; even Google is losing to OpenAI.
The problem of the closed patent system is the most damaging. In our current patent system, the patent holder is granted a 20-year monopoly on the use of their technology. This means no other companies are allowed to use it unless they enter into a licensing or royalty agreement with the patent holder. The aim of the patent system is to allow inventors and companies to recoup their costs and earn a profit from their inventions, providing a financial reward for their efforts. However, this also means they hold a legal monopoly on the technology.
Monopoly stifles innovation and drives up prices
Apple has a nearly 60% market share in the US and the second player Samsung only has 30%. They have been offering essentially the same phone for the last five years (can you tell which iPhone model is which anymore?), yet they continue to increase prices year after year. This is unusual as most other consumer electronics see their prices decrease over time. Think of the price of a TV now compared to 10 years ago. TVs keep getting cheaper and cheaper. This trend applies to most electronics you can buy from Walmart or Best Buy.
Some argue that when competition is too fierce, firms don’t make enough money to continue investing in R&D. However, even in the competitive TV market, TVs are getting bigger, with more features, better colors, and yet, they keep getting cheaper. Apple, on the other hand, just sits on its pile of cash. They tried to invest in EVs, then realized they couldn’t make money out of it and canceled it. They then pivoted to AI, which seems to be just what Samsung and Google already have on their phones. Even the Apple Vision Pro is largely a flop. The only bright spot is its M-series chips in MacBooks.
If the phone market were competitive, Apple would have to lower their prices, as they have already done twice this year in China due to competition from Huawei.
Apple and Google also engage in a practice called efficient infringement, finding it cheaper to fight patent holders in court for infringement rather than negotiating a license fee.
Technology Companies dominate other industries
During the last wave of mobile app startups, many traditional industries were disrupted. For example, with the rise of Uber and Lyft, many taxi and cab companies have gone out of business. Similarly, Airbnb has significantly impacted the hotel industry, as travelers increasingly prefer staying in private homes and apartments. Turo has disrupted the traditional car rental market by allowing individuals to rent out their personal vehicles. In the retail sector, companies like Amazon have led to the decline of many brick-and-mortar stores by offering convenient online shopping and fast delivery.
These industries often have many small players and are in healthy competition. When technology companies dominate these industries, the market is often left with only one or two players. This is bad for consumers as prices are eventually driven up due to a lack of competition.
Now, with the latest multi-modal LLMs, even more industries will be disrupted. OpenAI demonstrated that GPT-4o can tutor a student on math problems just like a human. It can break down a problem for the student and guide the student by asking questions. Private tutor jobs are at risk. Who wants to pay a human $50 an hour when you can have unlimited access to an AI tutor for $20 a month? The AI tutor will never get angry with you. Today, platforms like Udemy already offer online courses where you can earn a certificate from beginning to end without ever interacting with a human. My prediction is that within the next five years, we will have an entire school being automated, delivering better learning outcomes as each student will have access to an AI teacher anytime, 24/7.
Do we really want a few technology companies dominating every industry, from finance to Hollywood to healthcare? Can a company with human traders beat a company with an AI trader that can analyze the entire internet of data in real time and understand natural texts?
The Free Market of Invention
The advantage from scale is hard to overcome, but we can address the second problem by designing a better patent system. The original goal of the patent system is to actually encourage the sharing of technology with the public. By granting the patent holder a 20-year monopoly on the technology, the inventor discloses the technical details of their invention, and anyone can then use that invention for free when the patent expires. The 20-year monopoly is the incentive for the inventor to disclose the invention to the public.
If the goal of the patent system is to encourage sharing of inventions with society, why don’t we make this happen from day one?
This type of patent already exists; they are called standard-essential patents (SEP). These are patents that claim an invention must be used to comply with a technical standard, and the patent holders are required to license their essential patents on fair, reasonable, and non-discriminatory terms. These types of patents are usually for the required technology for a standard, such as 5G, and any company can license the technology while the patent holder cannot reject them.
What I am proposing is for all patents to be required to be licensed to any parties on non-discriminatory grounds. This breaks the monopoly power of the patent holder and allows for fair competition, ensuring all market participants have access to the same technology level. The patent holder can still set the price of their license fee or royalty, but they must be the same for all licensees.
This essentially forms a free market of invention, where the price level of each invention is determined by market forces. The patent holder is incentivized to set the price at a level that maximizes their income. If they set the price too high, then no one will license it; if the price is too low, their income drops.
But how do you prevent the patent holder from setting the price extraordinarily high to discourage anyone from licensing it and using that patent on their own products to profit from it? This is linked to the second part of my proposal.
Technology tax
I am also proposing a new type of tax on the licensing and royalties of technology. This tax applies to every use of a patent within the jurisdiction of the economy. Whenever a patent holder receives income from their patent, they must pay a percentage of that income to the government. This means that even when the patent holder uses the patent themselves, they must pay the technology tax to the government. This discourages monopolistic behavior by making the patent holder liable for substantial tax payments.
The technology tax rate can be adjusted annually. It should start small initially and gradually increase, either linearly or in another predefined manner, until it reaches 100% when the patent expires. After expiration, the patent belongs to the government, which can then set the price at a desirable level. The government should set the technology tax rate, the appreciation schedule, and the final price of the patent in a manner that benefits society, with sector-specific adjustments. For instance, in sectors with high R&D costs, such as pharmaceuticals, the initial license fee can be minimal, allowing the patent holder to recoup costs quickly and maintain more monopoly power at the beginning.
This tax differs from the current taxation of license fees and royalties, which are taxed as regular income similar to product sales and can be offset against other costs.
With this new tax, deliberate patent infringement would be considered criminal tax evasion. The patent holder can monitor any patent infringement and report it to the IRS if there is reasonable suspicion of infringement.
The non-discriminatory nature of patent and this technology tax effectively treats patents as a type of public resource, similar to natural resources such as oil and coal. Given the rate of technological progress, patents have a finite useful lifespan, with old technologies often being made obsolete by new ones. Therefore, the total economic value a patent can generate is finite, and the government should tax a portion of that value just like it does with natural resources.
Summary of Proposed Policy Changes to the Patent System
1. Non-Exclusive Patents: Patent holders must license their patents to any party on a non-discriminatory basis.
2. Technology Tax: The government will tax a portion of the income from patents at an appropriate rate and schedule that is sector-specific.
These two policy changes will make the market more competitive by ensuring that all companies have equal access to the latest technology, creating a level playing field. This will significantly reduce the ability of technology companies to use their inventions to gain monopoly power, allowing the market to flourish. Patent holders will still benefit from their inventions through license fees and royalty income, enabling them to recoup costs and be rewarded for their risks.
Next, I will discuss another measure that can further encourage competition and ensure that only innovation and adaptability are rewarded in a fair market.