Do Patents Lead to Economic Growth?
Recently I discussed a paper by David Autor, David Dorn, Gordon Hanson, Gary P. Pisano and Pian Shu. The paper noted that as competition from China increased, innovation by US firms, measured by patent output, decreased. I believe the result, but started to wonder… are patents a good measure of innovation? Do patents drive economic growth?
I don’t know how to measure innovation, but I can look at the relationship between patents and economic growth. We being by looking at patents per capita. I found patent data going back to 1840, and population to 1850. The graph below shows patents per capita beginning in 1850. (All data sources provided at the end of this post.)
Next, let’s compare that to growth rates. We would expect patents today to lead to growth tomorrow. So, I will add a line to the graph showing, for each year, the annualized growth rate in real GDP per capita over the next ten years. That is, for 1950, the growth rate from 1950 to 1960, and for 1980, the growth rate from 1980 to 1990. Unfortunately, real GDP per capita data begins in 1929, so the original graph gets truncated.
If it kind of looks to you like patents are not driving economic growth, well, it kind of looks like that to me too. In fact, if anything, the lines seem to be more negatively than positively correlated. In years where there are more patents, the subsequent growth rate in real GDP for capita over a ten year period seems to go down. Conversely, fewer patents in one year seem to be associated with more growth over the next ten years.
What’s going on? Well, obviously, if there is no protection for developing intellectual capital, nobody is going to put much effort into creating that capital. On the other hand, protecting intellectual capital too well can stifle economic growth. For one, it requires spending an awful lot on on attorneys. For another, it forecloses on a lot of areas of potentially fruitful research by a lot of people who are worried about stepping into a mine field potentially defined by other people’s patents.
A few notes…
1. I have a question. Anyone have any idea why there was a big rise in patents per capita beginning in 1983? What changed? Was it some aspect of the law? Something having to do with how research was written off? What’s going on?
2. Data… Data and estimates for the US population originates with the Census, but I’m using the set cleaned up by the Texas State Library and Archives Commission since its in an easy to use format. Since data was only available decennially with no annual estimates from 1850 to 1900, I linearized the decennial to generate my own annual estimates. Real GDP per capita comes from NIPA Table 7.1. Patent data comes from the US Patent Office.
3. If you want my spreadsheet, drop me a line at my first name (mike) dot my last name (that’s kimel with one m) at gmail with a dot com.
Software Patents? According to Wikipedia, in 1981 the Supremes changed their ideas about whether software could be patented. The case seems to be called Diamond v. Diehr, but I’m not a lawyer, and I may be misunderstanding it. Given a couple of years of hysteresis, due to the usual delays of patent granting, 1983 seems like it would be a plausible year.
I am just guessing here.
Up until PCs became common, the patent office generally refused to accept software patents (e..g., for such features as automatic capitalization of the first letter after a period or an exclamation mark in a document), on the grounds that these were mere programming tricks “obvious” to any working programmer.
That worked, when there were a dozen computer manufacturers over the entire world, and a couple hundred companies rich enough to buy software, and a couple thousand programmers. And then it didn’t.
These days, such “programming tricks” have become “intellectual property.” Corporations are eager to acquire/hold onto such IP, they hire hungry lawyers to defend their territory and courts are happy to recognize their rights. One can argue that maybe the pendulum has swung too far from its original position — and many many people have — and one can argue that protecting corporate rights is far from protecting the rights of the individual people who actually produced these bright ideas in the first place. And one can argue that neither patent examiners nor judges are especially skilled at distinguishing what are genuinely new ideas in programming from things that are indeed obvious — but the courts will not accept this.
Anyhow, the modern willingness to accept software patents is akin to the modern willingness to extent copyrights. It benefits corporations rather than individuals as a rule, it’s far far more widely spread than anyone would have imagined a generation ago, and it’s far from clear that the economic benefits are as large as once hoped.
genetic patents are the next big thing to cause havoc for society. That is, for society to live without owing someone just for the fact they were born or ate something.
Ditto Bill White & Mike Shupp on software patents. Also though hardware high tech patents began a run in the 1980’s due to relaxed requirements by the Patent Office on what constituted these technology patentable features. The patent office didn’t have the expertise or manpower to evaluate them all and Federal Patent office policy changed to issue patents if they seemed right and let the lawyers take issues to the courts for resolution of whether the patents issued were indeed valid or duplicates of other prior patents with minor (obvious) additions.
Key words in patents are: “Non-obvious to practitioners of the art”.
I’ve stated in another post on the topic that I reviewed ~ 500 patents in the late ’80’s or early 90’s finding 95% were worthless… most of those because they were obvious additions to prior patents… hence not actually valid patents when and if taken to courts… which is parenthetically why I was reviewing the patents … for a legal case between two huge (two largest?) international technology company’s.
I have to say I’ve been responsible for several software patent applications. I had a pretty low expectation for the level of novelty required for a novel patent application, but I was astonished. There are hundreds of patents on linear regression, for example, and that was first published in the 17th century. I was also pretty horrified by the result of filtering my text through the mind of a patent attorney. I didn’t recognize anything from my original proposal in the result.
I don’t think I’d ever contribute to such an effort today.
Mr. Kimel, I’ll note that there are two types of patents in general as I’ve stated before. Those that relate to productivity gains and those that relate to product feature enhancements. For many patents both productivity gains and feature enhancements occur in the same patent, with varying proportionality of how much is feature and how much is productivity related.
How then should patents relate to GDP?
GDP is dominated by end user consumption (65%- 70%). To the extennt that patents improve productivity they reduce prices (increasing or maintaining the patent holder’s market share, but reducing a competitiors). When reduced prices also increase consumption then the net improvement to GDP is the difference in volumes (increase) due to reduced prices and the difference in price (reduction) On average that should result in no change in total value of consumption.
To the extent product features are improved, the patent holder get’s a 17 or 19 year monopoly, charging therefore more than competitive products which doesn’t add a lot to composite consumption, therefore not a lot to GDP. .. unless the patent holder sells patent rights to competitors for a royalty charge in which case the new feature become the new norm at ever lower prices due to competition. In that case the net effect on GDP in near zilch since the new norm simply replaces the old norm.
In the 70’s, 80’s and ’90’s the computer based industries and products saw productivity gains by 100’s and 1000’s of times every couple or so years (chips, disk drives, lap-top screens). The net effect was a huge surge in volumes of high tech products to consumers at lower and lower prices per functionality simply because there was so much competition not to mention foreign production and products imports.
But all those tech products were in composite not a big proportion of consumption .. housing, food, automobiles, and clothes constitute the majority of consumption. The high tech volumes purchased with increased function replaced older function products but at lower prices so the net effect on GDP was negligible to small on consumption. Standard of living grew a lot, but GDP/capita didn’t..
What I’m saying is that Patents shouldn’t necessarily be thought of as GDP enhancers so much as they are productivity producers and standard of living enhancers.
In many ways patents reduce GDP.. for example disk drives enabled paper consumption and storage for paper files to cut by 50%? or more? Personal and Business computers enabled typewriters to go the way of the buggy whips, coupled with printers / duplicators, xerographic reproduction, and eliminated secretarial pools in droves over time. The internet with WiFi (routers and embedded communictions chips, which are just the “patents’ that produced the present modern form of telephone modems — recall those?) cut the use of envelope purchases and paper, not to mention increasing the proportion of typewriters biting the dust.
The drug industry has been charging monopoly rents (read exhorbitant profits) by their patents. Surely this has increased consumption for life-saving / life enhancing / life prolonging drugs in health care which is manifest in health insurance and out of pocket purchases. But if you think about it in GDP terms, these huge drug costs apply only to a small proportion of people consuming things, so it can’t have a very large effect on increasing GDP.
What I’m saying is that patents don’t necessarily create economic growth .. what they do primarily is increase standards of living per unit of income. They create more jobs if patents are product enhancing without also being productivity enhancing. Domestic chip production is in decline but functionality keeps growing by new patents Computer functionality keeps increasing with new patents, but prices keep falling (I.e. competition and productivity patent gains play a larger role than functionality gains.. the latter improve standards of living with the former making those increased standards of living more affordable to more people.
Here’s another factoid. A patent is applied for in the range of a year or two before a product using it starts being produced. But competition finds more than one way to skin a cat so the new patent only has about a year or at most two years worth of monopoly before the a competing patent is on the market. So in high tech at least the time between patent applied for and an economic gain (price increase, therefore a contributor to a greater GDP) being manifest is at most 3 – 4 years… that’s the outside max. That was true in the 1960’s as well as is now (excluding the monopoly power of pharmaceutical patents).
Example: In the 1960’s I used a slide rule. a good one cost $25. In the mid-1970’s I bought a TI reverse polish notation hand-held full function scientific calculator for $85..My slide-rules (I had two of them) were as obsolete in less than 5 years as a buggy whip. The then newest TI and HP hand held scientific calculator versions cost $300. But by 1980 I was using a mainframe from a terminal in my office 99% of the time with far more function, therefore far faster and far less of my time to do ~ 100x more work output than just 5 years earlier and over 1000 x more than I could do in the 1960’s. TI got the original patent on integrated function chips, but by1980 HP was producing competitive scientific calculators as were other companies with just as much or more function. How did that happen if TI had the patent on integrated circuits? You can read about that history, but the upshot is that it doesn’t take vary long for an industry to figure out the fastest way to maximize profits in a highly competitive market.
The explosive growth in semi-conductor function was due to it’s even more explosive growth in productivity of producing them… so prices kept dropping per unit function by even more than Moore’s Law.. due to competition. The contribution by high tech to GDP was not even measureable .. within electronics it was, but with he price drops being beyond the pale, there was no increase in GDP even though the patents were flying fast and furious.
It wasn’t until long after those patents had been applied for that the function and productivity they produced entered the mainstream business’s in composite… roughly the early and mid 1990’s and beyond where they show up in GDP growth… call it a 20 – 30 year lag.
For the record, even though I was hired to review 500 patents for the real value as an expert in the field, after I’d completed the work and written up the results, I was enjoined from further work, testimony, and all legal aspects because of an alleged “potential” conflict of interest… not that existed when I did the work, but would become a conflict due one company deciding to do business with another company invoved in the case by a “letter of intent” that was written/agreed near the end of my work on the patents.
There was some speculation by a couple of the legal teams that the “tetter of intent” was perhaps .. alleged by some attorneys in the case… actually inspired by the fact that my analysis was probably unassailable as an expert by the opposition, and thus a means to prevent my involvement or work content.
I mention this only to insure I’m not misleading anybody about my actual legal status in the patent reviews I did.
Also btw, I was fully and gainfully employed by Company A, but was hired by a 3rd party company (Company C) to do that patent evaluations and review. Company D and C were the litigants, but Company A, B, and D entered into a “letter of intent” to work together on some project in the future which made my work for Company C a “potential” conflict of interest. Company B would have been adversely affected by a ruling favoring company C though they weren’t part of the suit.
Interesting how legal beagles can modify the course of a suit mid-stream though. I have no knowledge of whether there was any real intent to enjoin my expertise by the “letter of intent”.. and I think it was actually purely coincidental The down side though was that my fee for reviewing the patents (a few hundred dollars per hour of my time to review and report) was pendant on providing expert testimony and opinion, so that in the end I was only paid ~ $65 per hour for my efforts. That was my bad decision in signing the contract to do the review. I should have requested the fee was fixed with no contingencies. Live and learn.
Also to make it perfectly clear, there were many other equally qualified “experts” to review these portfolio of patents… I was selected only because my credibility and integrity were well known and thus enhanced my expert opinion. I’d guess there were at least 30 other possible “experts” though I assessed only perhaps 5 or 10 of them being as well informed as my own.
Great discussion here! I have noticed a proliferation of “business process” patents since roughly the beginning of this century. Investment firms, banks, etc. are now patenting different lending schemes, investment strategies, etc. Sallie Mae, for example has filed (and received more than a few in the student loan arena.
Without a doubt, patents such as these do NOTHING to create growth. Any “invention” that is wholly concerned with the moving of money is, I would say, definitionally incapable of creating real economic growth. Definitionally, I would say intellectually property such as this does almost nothing more than provide for means by which the patent utilizer can extract more and more wealth out of an existing lending system/lending relationship.
I would maybe extend this claim to many if not most disruptive technologies that seek to refine existing systems of production and services, rather than creating new activities.
If you are looking for a smoking gun, try the Bayh-Dole Act of 1980. It let universities and small businesses funded by the government grab ownership of patents developed in the course of government funded research. I remember that this led to a big land grab. Before then, university research tended to produce IP in the public domain. After then, every school and research organization made a point of patenting even small incremental advances in hopes of getting a big payday.
Patents are a mixed bag. They can help inventors get paid properly for their innovations, but they can also stop a field in its tracks. In the 19th century, patent law enforcement in the US was remarkably lax. US companies would steal foreign IP with impunity. Even US inventors wound up having to fight to get the fruits of their patents, and many didn’t.
One of the great killer patents was the Wright brothers airplane patent that included the idea of controlling flight by changing the shape of an airplane’s wings. This effectively knocked the US out of the aircraft industry. Foreign nations, where the patent was more narrowly interpreted, took the lead in aviation. US aviation didn’t start moving again until the original patent expired.
In contrast, When AM radio was developed, Marconi helped developed the first patent pool lest patent fights prevent the development of the new industry. This led to competition in the actual production of radios. Apparently, there were IP violators who produced cheap radios called “jalopies”. As long as they didn’t get too big, the big guys left them alone.
One of the reasons the US has a robust computer industry was that von Neumann published the design of the ENIAC in the literature before a Eckert and Mauchly, later of UNIVAC, could patent it. You can imagine how stifling a patent on computers would have been. Instead, anyone could design a computer, though individual components could be patented, for example, core memory.
If you watch technology, you often see an efflorescence in the wake of an expired patent. Gore-tex, for example, was patented in the 1970s, but it wasn’t until the patent expired that it became a common fabric in rain wear or used for dental floss. Whether this is because the patent holder has to start innovating again or others can then start innovating is unclear, but the effect is real.
I don’t think patents make a very good proxy for innovation. They are more of a mixed bag. Think of them as a form of intellectual enclosure. A society requires both a broad commons and a solid set of property rights, but they need to be kept in balance. Too much privatization, and you get boats on the Rhine or trucks in the Congo getting tithed every few miles on their way to market. Too little privatization, and you get too many people with ideas not developing them since they know that they aren’t worth anything.
Thank you all for the great comments. I write posts as a way to teach myself something. But in this case, I definitely feel I got more from reading the comment section than from the effort of digging up data, doing the analysis and writing the post. I am very appreciative.
Economic Recovery Tax Act of 1981 also implemented the Research and Experimentation tax credit for the first time. Since extended 15 times.
I can spin a story where low productivity growth drives increased patent activity:
In good times, when productivity is increasing, improvements to products and processes can easily be turned into cash. You can build a factory using your new manufacturing ideas and sell your products at a price that your unenlightened competitors cannot match.
In bad times, when productivity growth is stagnant (no new ideas out there?), if you build a factory you find yourself in a cutthroat world of razor-thin margins. In this environment, the only way to improve your returns is to militantly apply for patents and then rely on lawyers to intimidate or shakedown your competitors.
In this story, patents are a sign of desperation by those who have run out of ideas that could make them money if put into practice.
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Thanks for the comment. I think you are right. When times are good, more money can be made putting resources somewhere other than filing patents.
The surge in patents in the early 1980’s was due to Congressional action which moved all patent appeals from the standard Federal appeals court circuit to the Appeals Court in the District of Columbia (now referred to as the Court of Appeals for the Federal Circuit, or CAFC). This was done initially to eliminate the waste of effort that patent attorneys put into shopping around for friendly appeals judges. In practice, it made the regulatory capture of the CAFC easier for the patent bar, and the result has been more judicial upholding of patents in disputes.
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Thanks for the comment I always find cases of regulatory capture interesting.
In 1980 – The Bayh-Dole law was passed that allowed federally funded inventions (i.e. inventions arising from Government Research Grants) to be held by the institutions where they arose (i.e. academic institutions). This led to a flurry of patent filings by Universities as they thought they would capitalize on this new windfall. Also at this time there was a landmark patent law decision (Chakrabarty) that allowed biotech patents to proceed. These led to a profusion of biotech patents and startups in the mid to late 80s and beyond. This has all not quite worked out as expected and many of the Universities did not quite recoup all the money they spent on patents even, although some did make a lot of money.
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