What is the source of economic growth? Trying times like these make this question even more important. The chart on the left is particularly instructive about the sources of economic growth. It defines what engineers call a boundary layer condition. The chart shows per capita income from 1000 BC to 2000 AD, where income has been normalized to one for the year 1800. The part on the left where per capita income final takes off is only true for western countries. For instance, African countries still have incomes near or below one on this chart and incomes in Japan do not take off for almost another 100 years.
So the million dollar question is why does income take off around 1800 after millennia of going nowhere? Let’s examine the standard answers for getting our economy growing today. Is the reason that income takes off around 1800 because taxes suddenly get lower (or higher) around 1800? No tax levels did not change significantly around 1800 and in fact they were lower than today until around 1900. Tax levels averaged 10% or less of GDP during most of history. Is it because the size of government suddenly shrunk (or grew) around 1800? No, the size of government did not change significantly around 1800. The size of government did not start to grow until around 1900. Is it because we suddenly created the world’s greatest “cash for clunker program” – in other words was Keynes right we just had to stimulate demand? Well during the period from 1000 BC until about 1800 AD is called the Malthusian period, after Thomas Malthus http://en.wikipedia.org/wiki/Malthus. During this period humans are just like every other animal and our population expands until we are on the edge of starvation. I am pretty sure that there was plenty of demand during this period, at least for food. Does income suddenly take off because we figure out how to control our money supply just right? No the tools for controlling the money supply around 1800 were pretty crude. The only reason we are wealthier today than in 1800 or 1500 or 1000 BC is because of our technology. If we had the same technology as our ancestors we would be no wealthier than they were.
I am not the only one to point out that increases in our level of technology are the only reason for real per capita increases in income. Robert Solow won the Nobel Prize in economics for essentially this point. Other economists who have study this area include Paul Romer of Stanford, Jacob Schmookler who studied the relationship between inventions and economic growth and Gregory Clark from UC Davis. This area of economics is often called Economics 2.0 or Innovation Economics. One of the best books on this area (other than my book The Decline and Fall of the American Entrepreneur ) is a business book, entitled The Invisible Edge.
Not coincidentally 1800 is around the time the first modern patent systems are created. Patents are the only free market system for encouraging people to invest in inventions and technology. Patents are legal title to your invention. The first patent statute in the US is passed in 1790. The US becomes the economic and technological leader of the world because of our patent system, not because of some innate Yankee ingenuity. We are the first country in history to recognize that inventors’ have a right to their inventions. In fact, the only place where the US Constitution uses the word “right” is with respect to patents and copyrights.
Despite the overwhelming evidence for the connection between patents, technology and economic growth, some detractors are going to argue that this is just coincidence. The chart at the right shows per capita GDP for various countries. As already explained US per capita GDP takes off around the time we create our patent system. Japan comes to the US and studies why we are successful around the 1860s. Their conclusion is that the US patent system is why the US is a technological and economic powerhouse. As a result the Japanese copy the US patent system sometime in the 1870s, which is when their per capita income takes off. A similar situation occurs in China. On the other hand there are numerous countries with no patent system or ineffectual patent systems that are stuck in the Malthusian trap.
Patents are the free market system for conferring legal title to inventions and encouraging investment in technology. Increases in technology are the only way to increase real per capita income. A strong patent system is keystone upon which economic growth is built.
 US Constitution, Article 1, Section 8, Clause 8. Note the Bill of Rights are amendments to the Constitution.
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 Continue reading
It is quite common to hear that only 2% of all patents every make money. Apparently this myth has been around for a long time, because Jacob Schmookler in his 1966 book Invention and Economic Growth, he investigates this myth. His survey show that over 50% of patents are commercialized. He states that “prevailing opinion has proved to be in serious error.” He found similar results in Europe, based on the percentage of five year maintenance fees paid. He states that even “many corporate officers who doubted the accuracy of the (commercialization rates) later found that their own companies’ experience confirmed the findings.” He notes that most people are only able to perceive giant steps in an area of technology. As a result, most people not skilled in the art deny the novelty encompassed by the average invention. A recent survey in China finds that 70% of patents are commercialized in China.
 http://www.howtomakemoney4life.com/learn-how-to-make-money-off-patent-royalties/; http://www.inventionstatistics.com/Innovation_Risk_Taking_Inventors.html; http://www.canosoarus.com/16InventorTips/Tips02.htm;
 Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge, Massachusetts, 1966, p. 49.
Jacob Schmookler, who conducted the most extensive econometric study of patents, estimated the mean value of a patent as $80,000.00 in 1966. Adjusting for inflation this would place the mean value of an issued patent at $506,000.00. This estimate seems reasonable based on other data points. For instance, Intel’s venture capital arm around 2000 would increase the valuation of any start-up they invested in by $1 million for each issued patent. Of course, not all patents are created equal and the very illiquid market for patents means that the value of any particular patent will vary significantly. If there were a strong secondary market for patents, we would not only have a better understanding of the value of an issued patent but also less variation. For more on how to create a strong secondary market for patents see Jump Starting a Secondary Market for Patents. (http://hallingblog.com/2009/11/16/jump-starting-a-secondary-market-for-patents/)
 Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge Massachusetts, p. 55, 1966.
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