Opinion | What’s Better, a Prize or a Patent?

Earlier this year, Elon Musk, the billionaire co-founder and chief executive of Tesla, promised $100 million in prizes to inventors who come up with ways to remove greenhouse gases from the atmosphere. The rewards, which will be awarded by the X Prize Foundation, are part of a cornucopia of cash that’s being dangled to induce innovation around the world. The European Innovation Council, the MacArthur Foundation, and the U.S. government through the America Competes Reauthorization Act of 2010 are among those splashing around big bucks.

This largess is welcome. Humanity faces some tough challenges, and if prizes get people to think harder about solutions, great. But there already is a serviceable mechanism for encouraging innovation: the patent.

The value of patents is market-driven. A patent that is useful to society can make its owner billions, while one that isn’t will sit on the shelf. Contrast that with a prize. No matter how illustrious the judges, they will occasionally miss a good idea and reward a dud.

To sort this out, I interviewed two smart people on opposite sides of the argument. The skeptic is Zorina Khan, an economist at Bowdoin College in Maine who has studied the history of prizes. The supporter is Marcius Extavour, a physicist and vice president for energy and climate at the X Prize Foundation.

Khan told me in an email that her research “offers the most comprehensive empirical analysis of innovation prizes ever completed.” She assembled a database containing 65,000 of them dating back centuries, including the famous Longitude Prize promised by the English Parliament in 1714 to whoever could help seafarers figure out their longitude — their east-west position on the globe.

In 1790 America’s founders started what became the U.S. Patent and Trademark Office with the conviction that patents were more democratic than prizes, which, Khan says, tend to be given to those who are already famous. European nations in the 18th century relied more on prizes. “Elites have always distrusted markets” and preferred to trust the judgment of a “favored few,” Khan said in a podcast by the environmental group Resources for the Future based on her 2020 book, “Inventing Ideas: Patents, Prizes, and the Knowledge Economy.”

The Longitude Prize was a case in point. It was eventually given to a Yorkshire clockmaker, John Harrison, but not without opposition from scientists who thought that a clock was prosaic and the prize should go to an astronomer. (Dava Sobel, a former New York Times science reporter, captured this nicely in her 1995 book, “Longitude: The True Story of a Lone Genius Who Solved the Greatest Scientific Problem of His Time.”)

The arbitrariness of prizes came home to Khan while she was breaking the red wax seals on rejected applications for a French prize in a dusty attic in Paris. “A lot of these applicants said they were in a desperate situation,” she said on the podcast. “They were pleading for support from the prize-granting committee. But just think about this: Some administrator had just put the letter in his file, unopened, and tossed it aside. And I was the only person in 200 years who’d ever set eyes on the contents.”

She is more than a little cynical about prizes, which she says mostly burnish the reputations of those who award them. “I am quite confident the X Prize will benefit Elon Musk more than it will the planet,” she told the podcast audience.

Extavour begs to differ, of course. “Prize design is like game design,” he wrote recently. “The goal is to develop a set of incentives, and rules that govern those incentives, in order to drive innovation in a particular direction and achieve the specific goals of the prize. The process is part art and part science.”

Extavour doesn’t dismiss the value of patents. “Most of the competitors tend to be I.P. holders of some type,” he told me in an interview, using the abbreviation for intellectual property. Inventors don’t have to surrender or license their patents to enter.

But he says patents aren’t strong inducements if there’s no commercial marketplace for the product or service. There’s not a lot of money to be made today from removing carbon from the atmosphere because the price of emitting carbon is low to zero. Extavour compares it to garbage removal. No family would pay to have its garbage removed if it could dump it on the neighbor’s lawn at no cost.

That’s actually a point of partial agreement between the two. Both Khan and Extavour favor carbon taxes or a cap-and-trade system, as in the European Union’s emissions trading system.

The X Prize is just one element in an innovation ecosystem that includes patents, angel investors, venture capitalists, contract manufacturers and others, Extavour says. “It’s all about generating more activity in the innovation space, using the prize structure and the cash as the spark, and then forming a lot of partnerships that will outlive the prize and maybe even end up being more meaningful than the prize in the long run,” he says.

Answers Khan in an email: “Prizes are exciting? Perhaps. The real issue is how effective they are at coming up with scalable solutions that can be commercialized and continuously calibrated to meet changing circumstances. The evidence shows that they generally fail to do so.”

I come away agreeing with Extavour that there is probably a role for prizes, while agreeing with Khan that the hype around them is a bit much.

Number of the Week

600,000

The increase in nonfarm payroll employment in August, according to an estimate by BofA Securities, a unit of Bank of America. That’s lower than the Wall Street median estimate of 769,000. BofA analysts said they based their low estimate on employment data from private sources that has come out since the July jobs report. The Bureau of Labor Statistics will release the official data on Friday.

Quote of the Day

“The term ‘property,’ in the abstract sense of a thing’s mode of being, has a twofold origin, theological and juridical, which can still be discerned in the French expressions ‘amour propre’ or ‘biens propres.’ This twofold origin goes back to the general meaning of ‘proper’ as the unsoiled, the intimate. … The connection between ‘proper’ and ‘property’ thus seems to be more than an accident in a single language; it seems to be a constant.”

— Frederic Nef, “Property,” in “Dictionary of Untranslatables: A Philosophical Lexicon” (2014)

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