Patent levels and economic growth - a lesson from history

Skim read the first section; not the four points that are highlighted - these can be distilled into a very short sentence and will work in macro essays (hint: might come in handy for the exam...) - and note the point about resisting disruption (slavery). The article is not long, but this sort of material really gives the sort of background that demonstrates wider reading clearly to the examiner:

How to Boost Patents

Charles Hughes

June 20, 2017

Regulation

The rate of meaningful innovation appears to have slowed, with negative consequences for economic growth and living standards. To try to understand these changes and why they are happening, it is worth learning from past episodes when American innovation was in the ascendancy, a key driver helping America become the most powerful economy in the world.

What factors were conducive to patenting in this period? How was the rate of patenting related to growth and mobility? In the past, invention was an important mechanism for social mobility.

A recent working paper provides some estimates for how important invention and patenting were over the course of a century. Ufuk Akcigit and John Grigsby of the University of Chicago and Tom Nicholas of Harvard University use a new dataset linking millions of patent records to Census data and state and county-level economic data. These linkages allow them to provide some new insight into why some states seemed more innovative using patents as a proxy over this golden age, and to try to quantify the effect.

When it comes to fostering an environment that encourages invention and patent activity, the stakes for states are high. Even though inventors accounted for just 0.02 percent of the population they had a substantial effect on their surroundings.

The authors find a strong positive relationship between patent activity and GDP growth at the state level. They predict that a state with four times as many patents as a less innovative state would become 30 percent richer in terms of GDP per capita from 1900 to 2000. This is roughly equivalent to the gap between the United States and New Zealand.

Source: Ufuk Akcigit, John Grigsby, and Tom Nicholas, “The Rise of American Ingenuity: Innovation and Inventors of the Golden Age,” National Bureau of Economic Research, 2017.
The authors analyze what factors influenced the level of inventive activity over this period, identifying four major factors:

1. Population density: a higher degree of urbanization tended to have more innovation. Clusters of people and ideas interacting were conducive to higher levels of inventiveness.

2. Strong capital markets: a higher level of bank deposits per capita, indicating a more stable, robust banking system, was associated with higher levels of patent production. Access to capital is important for inventors trying to develop their ideas and bring them to market.

3. Access to other geographical regions: the size of the market inventors could reach was important, both for the exchange of ideas and to sell their products. Stateswith a high cost of shipping goods out of state by road, rail, or waterways, were more geographically isolated and tended to have lower levels of patent activity.

4. Openness to new ideas: using a measure of families that owned slaves as a proxy for being averse to potentially disruptive ideas, they found a strong negative relationship between a legacy of slavery and patent activity.

These state-level factors matter because the authors find evidence that inventors were more likely to move from their home states and that they tended to move to states with an environment friendly to inventiveness and patent activity.

The degree of patent activity did not just matter for aggregate measures like economic growth, but on the personal level as well. The number of patents filed in a state was positively correlated with higher social mobility as measured by fraction of people with a high-skill occupation who had a low-skill father. Inventiveness has been an important source of competition and a channel of social mobility in America’s history.

Source: Ufuk Akcigit, John Grigsby, and Tom Nicholas, “The Rise of American Ingenuity: Innovation and Inventors of the Golden Age,” National Bureau of Economic Research, 2017.

Granted, the framework of innovation was much different in the golden age than it is now. When Thomas Edison and Nikola Tesla were embroiled in their arms race of ingenuity, most inventors operated outside firms either independently or in research laboratories. The authors find that the share of patents assigned to corporations rose from less than 10 percent in 1880 to almost 80 percent by 2000.

The relationship between location of the inventor and patent activity is also less straightforward. The share of U.S. patents granted to companies of foreign origin has been increasing over time, so it is possible the local factors might not matter as much as they did in the past.

Patents only account for one form of innovation. There are also trademarks, trade secrets, and copyrights. The United States has been more innovative in the latter three. As such, studies focusing on patent activity could underestimate the true level of innovative activity in some instances. 

The nature of invention and patent activity has changed, but the factors identified in this paper are still important. Access to markets, ideas, and capital give inventors the tools they need. Openness to new ideas allows their innovations to flourish. Creating an environment conducive to innovation (using patent activity as a proxy) is important for bolstering economic growth and upward social mobility.

Policymakers searching for ways to reignite American ingenuity would do well to heed the lessons from the country’s golden age of innovation.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on  twitter @CharlesHHughes.