State of Innovation

Patents and Innovation Economics

A Modest Proposal for Academic Economists

In one of my earlier posts, Patent Quality Non-Sense , I pointed out that the R&D (Research and Development) per patent ratio, GDP per patent ratio, and number of citations per patent have all increased over the last fifty years.  These were all statistically significant changes.  Based on this evidence I concluded that the quality of patents (or threshold for obtaining a patent) has increased over the last fifty years.

I was fortunate enough to have an academic economist send me a message pointing out that there were several papers by academic economists that have been debating why the R&D per patent and GDP per patent ratio have been increasing.  One of these papers suggested the reason for this phenomena was that as technologies are explored they become mined out – the cost of obtaining a new invention keep increasing.  Of course this issue had been explored in the 1950s by the famous economist, Jacob Schmookler, in his book “Inventions and Economic Growth.”  Professor Schmookler showed that across multiple industries the amount of R&D per patent was essentially the same.  See figure 2, page 46, figure 22, page 138, figure 23, page 139. 

 

Since these industries included both new industries and mature industries, it is clear that the idea of running out of new inventions is academic non-sense.  Professor Schmookler also showed that horseshoes, which were invented over 2000 years ago, had a regular stream of issued patents in the 19th century until automobiles replaced horses as the main mode of transportation.  If any area of technology should have been played out, it is horseshoes.  If the mined-out theory of technologies were true, then it would suggest that knowledge is limited.  There is no evidence that there is any limit to knowledge.  Inventions are combinations of known elements.  Each new invention forms a new element upon which future inventions may be built.  As a result, the set of potential inventions is infinite. 

Another paper has discussed why the citations per patent has increased.  They suggested some sort of inflationary effect in citations over time.  None of these papers came to the obvious conclusion that the quality of patents has increased.  None of these papers also suggested the corollary that the return for obtaining a patent had decreased over the last fifty years. 

None of these academic economists even looked at the obvious reason why R&D per patent or GDP per patent would have increased – namely the value of obtaining a patent has decreased.  Jacob Schmookler even created an equation to show when it makes economic sense to obtain a patent.  A rational inventor will compare the cost of obtaining a patent to the expected return.  Over the last fifty years we have continued to increase the cost and time it takes to obtain a patent, which would decrease the rate of patenting.  The value of having a patent has varied over the last fifty years.  For instance, in the early 1980s the validity of patents were strengthened and the Court of Appeals for the Federal Circuit was created and all patent appeals were consolidated in this court.  The purpose was to provide consistency for patent appeals and it succeeded.  While in the 1930s and 1970s patents were under attack by anti-trust law. 

It is amazing that an academic economist repeated research done in the fifties and an academic journal decided it was worth publishing.  These papers did not add any real information.  In the world of patents these papers would not have be considered novel, let alone non-obvious.  These repetitive papers do not represent high-minded scholarship, logic, or reason.  They represent either ignorance, theology or academic cynicism as will be shown below. 

Rules of Logic/Reason

Here are a couple rules that have been known at least since the enlightenment that academic economists might use to actually make some progress instead of arguing about the number of angels that can dance on a pinhead.  

Occam’s razor (or Ockham’s razor), entia non sunt multiplicanda praeter necessitatem, is the principle that “entities must not be multiplied beyond necessity” and the conclusion thereof, that the simplest explanation or strategy tends to be the best one.  (Wikipedia)

Hume’s Corollary:  Extraordinary claims require extraordinary evidence. 

Anecdotal  Evidence:  An isolated incident is not proof of a general conclusion, especially if it violates Occam’s razor.  It also does not represent extraordinary evidence under Hume’s corollary.  Just because you can find an object that is moving in the opposite direction of the force of gravity at one point in time does not prove that gravity does not exist.  It just means that another force is acting or acted upon the object.

Application of Rules of Reason (Patent Quality)

The papers suggesting area’s of technology were “mined out,” fail to meet Occam’s razor.  The simplest explanation is that the return for obtaining a patent has declined over the last fifty years.  The complexity, timeframe, and cost of obtaining a patent have all increased in the last fifty years.  The strength of patents is determined by the probability a patent will be held valid if adjudicated, the probability that an infringer of the patent will be found to infringe the patent in court, and the cost and time it takes to enforce the patent.  The strength of patents has varied over time, hitting lows in the 1930s and 1970s, and strengthening in the early 1980s.  This is consistent with the data.  Schmookler’s research clearly shows that across a wide variety of industries at various levels of maturity, the R&D per patent is essentially the same.  This is totally inconsistent with the mining out theme.  The people suggesting alternative explanations have to meet Hume’s corollary since they are arguing a position that is not supported by the evidence, a position that is not consistent with the simplest explanation, and an explanation that is consistent with economic knowledge generally. 

The papers attempting to show that there is some sort of inflationary effect don’t meet Occam’s Razor either.  First, there is no logical reason for why the number of citations per patent would increase at the 3.3% rate per year reported.  Citations are not subject to diminution in their value like money.  Second, this is not the simplest explanation.  The simplest explanation consistent with both the increase in R&D per patent, GDP per patent and increase in citations is an increase in patent quality or equivalently a decrease in the expected return on obtaining a patent.  Third, they do not provided extraordinary evidence for their extraordinary claims. 

Application of Rules of Reason (Economics Generally)

By applying these rules to economic issues generally, we could eliminate wasted time and effort on absurd issues.

Minimum Wage:  Every time politicians propose raising the minimum wage, a professor of economics from a prestigious university states that raising the minimum wage will not affect the unemployment rate.  The only way this is possible is if the minimum wage is set so low as to be meaningless.  This sort of absurd statement should get a high school student in AP economics a failing grade.  There is no evidence in all of economics that raising the price does not reduce the demand.  Marketing examples of raising the price of a particular brand of a class of goods causing an increase in the demand for that brand falls under the anecdotal evidence rule.  A brand is not the complete market for the good.  Most likely this brand is stealing market share from another brand of the same good.  Under Occam’s razor the simplest answer consistent with the facts and the law of supply and demand is that raising the minimum wage will increase unemployment.  The professors who suggest otherwise have to meet Hume’s corollary and provide extraordinary evidence for their extraordinary claim.  Of course, they never do this.  They just wave their hands and conjuncture that it will not happen in this case or they point to some anecdotal evidence.  This is not reason, it is not scholarship, this is cynicism.  This is the sort of cynicism that believes the world is unknowable and perverts economics into theology. 

 Consumption creates wealth:  Over and over again we are tortured by academic economists who tell us that consumption is the route to wealth.  Adam Smith proved this is not true.  Anyone living on a deserted island knows this is not true.  There has never been a case where a country pursues a policy of consumption (simulating demand) where they have succeeded in creating wealth, they just redistribute the existing wealth at best.  Clearly, the “consumption creates wealth” thesis fails Occam’s razor.  The proponents of the “consumption creates wealth” thesis have made an extraordinary claim, but they have never provided even modest evidence for their proposals let alone the required extraordinary evidence they need under Hume’s Corollary.

If the economics profession would just apply these simple rules, it would inspire confidence in the public that economics is based on reason and maybe has some scientific basis.  Because academic economists do not apply these simple rules, the public believes economists are more similar to the theologians discussing how many angels can dance on a pinhead than scientists.

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January 13, 2010 - Posted by | Innovation, Patents, Uncategorized | , , , , , ,

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