A patent grants its holder the right to exclude others from using an invention. At first glance this looks anti-social — yet it is one of the most effective engines of prosperity that modern economies possess. It turns an idea into a tradable asset, makes research financeable, attracts capital, and rewards not only whoever invents a new process but whoever brings it to market. Socialist planned economies abolished precisely this right to exclude — internally. In doing so, this article argues, they sacrificed a central driver of innovation and economic power. The three cases of the Soviet Union, the GDR and Cuba show the mechanism and its price.
The economic starting point: property rights create prosperity — including intangible ones
That secure, enforceable property rights are the foundation of prosperity is among the best-supported findings in institutional economics. Douglass North showed that societies grow rich precisely where rules reliably assign the returns of productive effort to those who generate them; Daron Acemoglu and James Robinson traced differences in national wealth to “inclusive” versus “extractive” institutions, at the centre of which sits the property regime. Hernando de Soto coined the term “dead capital” for the absence of formal title: values that exist but cannot be mobilised as collateral, tradable goods, or a basis for investment.
What holds for land holds, in the knowledge economy, all the more for intangible assets. The value of modern companies today lies overwhelmingly in intangibles — patents, brands, know-how, data. A patent is the legal title that makes an invention capable of being booked, licensed, pledged and sold in the first place. Devalue that title and the invention does not disappear — but the incentive to invest in it, commercialise it and scale it does. This is exactly where the weakness of the socialist model begins.
1. The Soviet Union: invent much, exploit little
After the October Revolution, the Soviet Union nationalised inventions and created, as a socialist alternative to the patent, the inventor’s certificate (avtorskoe svidetel’stvo): the invention became state property, while the inventor received recognition and remuneration — but no right to exclude. Patents survived only as a parallel institution, used almost exclusively by foreigners. The logic behind it was deliberately anti-capitalist: knowledge was to flow freely between state enterprises rather than being locked up behind monopoly rights.
From the standpoint of institutional economics this was a consequential design flaw. The system optimised for the number of inventions and for the free flow of information — and blanked out the decisive variable: the incentive to actually turn an invention into a better product or process. Because enterprises operated as monopolies, were measured on plan fulfilment rather than competition, and the inventor’s reward was capped, the drive to introduce novelties was missing. The result is well documented in the literature as the “Soviet innovation problem”: much was invented, too little implemented and diffused. Observers attributed to Soviet patent law a dogmatic mindset that inhibited innovation rather than fostering it. Later Russian scholarship speaks of an institutional mismatch — of lost opportunities to generate growth from knowledge that already existed.
The contradiction is telling: the very institution meant to liberate knowledge decoupled inventing from exploiting — and thereby stripped the economy of the feedback loop that, in the West, turns inventions into productivity.
2. The GDR: the natural experiment
No other case illustrates the thesis as vividly as the German division — a controlled experiment with a shared language, culture and industrial history that differed only in economic system. East German patent law knew two routes: the exclusive patent (Ausschließungspatent), which corresponded to the Western patent, and the economic patent (Wirtschaftspatent), which could be used by all state-designated enterprises while the inventor received only a remuneration — capped, after the 1963 amendment, at 30,000 Mark. The state steered the choice forcefully: filing an economic patent cost 20 Mark, an exclusive patent 250 Mark, whose annual fees ran up to thirty times higher. For inventions arising in publicly owned enterprises, only the economic patent was permitted in any case.
The outcome was a patent order that effectively abolished the right to exclude: of roughly 111,000 GDR patents at reunification, only about 14,000 — just under 13 percent — were exclusive patents. A large body of protective rights thus existed with no tradable market value. The reaction, once a real market appeared, is revealing: more than 19,000 holders applied to convert their economic patent into an exclusive one. The right to exclude others became valuable at precisely the moment there were competitors and prices.
The economic record of this system is unambiguous. The GDR was regarded as the most developed country of the Eastern Bloc — and still lagged: by the late 1980s its per-capita GDP fell short of West Germany’s by around 30 percent, and labour productivity at unification stood at only about a third of the Western level. According to estimates by Akerlof and colleagues, only around ten percent of the GDR workforce was employed in firms viable at world-market prices; the East German economy collapsed in 1990/91 on a scale unprecedented in modern economic history. Research links this weakness directly to the centrally planned system, which systematically inhibited innovation, distorted the allocation of resources and undermined long-term growth. Even three decades later, and despite enormous transfers, the East reaches only around two-thirds of the Western per-capita level on many measures. Two systems, one people — and a productivity gap whose root lay substantially in the missing regime of incentives and property.
3. Cuba: the exception that proves the rule
Cuba appears to be the counter-argument: a socialist state that is a monopolist domestically and yet ranks among the notable innovators of international biotechnology. The state umbrella corporation BioCubaFarma reports around 2,640 patents in Cuba and worldwide, of which roughly 2,438 are held outside Cuba, and has registered 765 products in 53 countries. Developments such as Heberprot-P for diabetic foot ulcers, the cancer immunotherapy CIMAvax-EGF, or the COVID vaccines Abdala and Soberana are protected by patents in numerous jurisdictions.
On closer inspection, however, Cuba confirms the thesis rather than refuting it — for three reasons.
First, the success is concentrated in a narrow, state-selected niche that has been fed with prioritised resources over decades. It is the product of concentrated subsidy, not of a broad innovation culture nourished by ownership incentives. Outside this “scientific pole,” the Cuban economy is marked by chronic stagnation and by hard-currency and supply crises.
Second — and this is the decisive point — Cuba patents almost exclusively abroad. At home, where the state alone produces, the right to exclude is worthless; inventions are used freely within the country’s own health system. The patent becomes valuable only where there are markets, competitors and paying demand: in exports, in licensing, in joint ventures with foreign capital, for instance in the Mariel special development zone. To draw prosperity from its inventions, Cuba must therefore reach into precisely those property-based market economies that its own system denies internally. Here the patent is an export and hard-currency instrument — proof that innovation only creates value once it plugs into a property order.
Third, even this island runs into its limits: biotechnology is extremely capital-intensive, and capital is scarce in Cuba; the US embargo, international regulatory hurdles and a deep currency crisis constrain the returns. A state can finance world-class research at isolated points — but without the capital-forming power of tradable property rights, it cannot turn that into broad, self-sustaining economic strength.
The mechanism of failure
Bring the three cases together and a clear pattern emerges. Where the right to exclude intangibles is absent, several chains of causation collapse — the same chains that, in market economies, convert inventions into prosperity:
- No price signal. Without exclusivity there is no market price for an invention — and therefore no information about which novelty is worth scarce resources.
- No incentive to commercialise. Anyone who cannot exclude, and whose reward is capped, has little reason to undertake the arduous, risky work of implementation and scaling.
- No capital formation. Intangible assets without legal title are “dead capital”: they cannot be pledged, traded or used as a basis for investment.
- No market entry. Without company formation and competitors, the selective pressure that weeds out poor solutions and spreads good ones is missing.
The inventor’s certificate and the economic patent rewarded the inventor — but they severed the feedback between inventing and exploiting. Innovation became a cost item of the planning bureaucracy rather than a driver of productivity. The cumulative effect over decades is that very productivity gap which the German division made so relentlessly visible.
In fairness: not a plea for IP maximalism
This critique is no licence for a boundless patent system. The West, too, knows the downsides of excessive protection — patent thickets, “trolls,” blocked follow-on innovation, disputes over access to medicines. And Cuban biotechnology shows that targeted state research can produce real, humanitarically valuable results. The point is not “as much protection as possible,” but something more fundamental: an enforceable, tradable property right in intangible values is a necessary condition for turning inventions into lasting prosperity. That condition is exactly what socialist systems structurally failed to meet internally — and they paid for it in innovative capacity and economic performance.
Takeaways for IP practice
- The right to exclude is not an end in itself but a prosperity mechanism. It makes inventions capable of being booked, financed and traded — the precondition for knowledge becoming value creation.
- Reward without an incentive to exploit is not enough. The inventor’s certificate and the economic patent honoured the inventor without incentivising commercialisation — the GDR figures (only ~13% exclusive patents, then over 19,000 conversion requests) show where the market value really sat.
- The German division is the litmus test. One people, two systems, a productivity gap of roughly two-thirds to one-third at unification — driven substantially by the missing regime of incentives and property.
- Cuba confirms the rule. A monopolist patents by the thousand — but abroad, because value arises only where a property order sustains markets. Without capital formation out of intangibles, even world-class research remains an isolated island.
- Intangible assets are today the core of corporate value. Whoever fails to secure them legally fails to mobilise them — and forfeits precisely the value creation that carries modern economies.
Socialist patent systems were no accident but the consistent application of an idea: that knowledge should belong to all. Economically, however, the uncomfortable finding holds that it was precisely the communalisation of the right to exclude that weakened the power to turn ideas into prosperity. Property — including, and especially, in intangible goods — is not an obstacle to innovation. It is its precondition.
Photo: © Jorge Láscar, [CC BY 2.0]
