State of Innovation

Patents and Innovation Economics

Patents = Wealth

How Strong Patents Make Wealthy Nations is an excellent paper that provides overwhelming evidence that patents create economic wealth.  The paper has two excellent charts.  The first chart shows the strength of a number of countries patent systems versus their wealth.



The second chart compares the per capita GDP of the U.S., Great Britain, and Brazil from 1700 until 1913.  The U.S. and UK had patent systems, while Brazil did not and Brazil and the U.S. became independent about the same time.  The result is that Brazil’s per capita GDP hardly changes while the U.S. and UK experience an over five-fold increase in per capita incomes from 1800 to 1913.



This paper has important implications on economists Paul Romer’s work.  Paul Romer is one of the leading new growth economists and is often mentioned as likely future recipient of the Nobel Prize in economics.  Romer and Robert Solow have shown that increasing levels of technology are the only way we increase real per capita wealth.  Romer contends that property rights for inventions (mainly patents) are always a bad trade-off.  He argues that strong patent systems encourage the creation of new technologies, but they inhibit the dissemination of new technologies.  His reason for this position is based in his belief in the theory of “pure and perfect competition.”  Alternatively, weak or non-existent patent systems result in good distribution of new technologies but they are poor at creating new technologies.  It is clear that this paper provides significant empirical evidence that Romer’s idea that property rights are always a bad trade is incorrect.


I have one minor criticism with this paper.  The authors argue that the patent system in the U.S. helped manufacturing.  Manufacturing is not what causes increases in our per capita income and inventions sometimes hurt manufacturing.  For instance, digital printing and the Internet have completely destroyed the manufacturing side of the publishing industry and 3D manufacturing has potential to do the same thing to manufacturing in other industries.  The question is not whether patents help manufacturing, it is whether it makes us wealthier.



How Strong Patents Make Wealthy Nations by Devlin Hartline & Kevin Madigan


June 24, 2016 Posted by | -Economics, Innovation | , | 1 Comment

Patents Cause Economic Growth: Another Academic Study Shows

Two Singapore professor show patents result in significant economic growth.  Their paper, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries concludes “the effect of strengthening patent rights on economic growth was substantial in economic terms.” P. 16

In the abstract of the paper, they conclude:

Our results have important implications for public policy. One is that patent laws and their enforcement matter for economic growth. However, our findings also suggest that patent rights vary by country and industry. We show that patent rights have a smaller impact on economic growth in poorer countries and in less patent-intensive industries. Since patent intensive industries account for a smaller share of the economies of the poorer countries, our results imply that the welfare gain in terms of economic growth for these countries is more likely to be outweighed by the welfare loss due to lower end-usage, and hence, tip the balance towards weaker rights being socially optimal.  Abstract

The paper’s conclusion with respect to “poorer” countries being better off with a weak patent system is pure conjecture and was not part of their study.  The reason that poor countries do not see a big boost by having stronger patent laws is: 1) poor countries are technologically backward and can advance economically by copying (purchasing) existing non-patented technologies, and 2) poor countries have poor property rights systems diminishing the effectiveness of their patent systems.  A poor country is poor because of its low level of technology.  Just raising a poor countries level of technology to the same level as the United States twenty years ago would result in huge economic gains.  The reason poor countries have a lower level of technology is because they have weak property right systems that results in under investment in technology (Capital Spending).  The paper hints at this point:

Our patent rights index depended on an assumption that enforcement of patent rights was correlated with enforcement of property rights in general, as measured by the Fraser index (The Fraser Institute does a study of economic freedom for all countries once a year). P. 10

In Figure 1, we plotted the Fraser index against the GP index (Patent Strength) scaled up by a factor of two.  The two indices were highly correlated. P. 10

In other words, there is a strong correlation between the strength of property rights in general with the strength of a patent system in a country. This should not be surprising since patents are property rights in inventions.  If you did a study of arbitrary government grants or monopolies versus the strength of patents in countries, you would find they are highly uncorrelated.  Despite the nonsense that suggests that patents are monopolies.

Another interesting point in the paper:

Among 15 Western countries over several centuries, enactment of patent law was associated with higher rates of scientific discoveries, inventions, and innovations.

Hu , Albert G.Z. and Png , I.P.L., Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, August, 2010.


October 21, 2011 Posted by | -Economics, -Philosophy, Innovation, Patents | , , , , | 1 Comment

Another Study Showing Economic Growth is Connected to Patents

This empirical study investigates the dynamic link between patent growth and GDP growth in G7 economies by Josheski, Dushko and Koteski, CaneGoce Delcev University-Stip, Goce Delcev University-Stip.  Here are some interesting quotes from the paper.

Technological change has been regarded as a major source of long-run productivity growth (Romer, 1990, Grossman and Helpman, 1991), with innovation no longer being treated as an exogenous process.

Johansen’s procedure for cointegration showed that long run multipliers are positive between the patent growth and GDP growth in G7 economies.  Granger causality test showed that patent growth Granger cause GDP growth in G7 countries.  Unrestricted VAR showed that there exists positive relationship between patent growth and GDP growth at two or three lags.


September 19, 2011 Posted by | -Economics, Patents | , | Leave a comment