The Brookings Patent Report is Bogus

Brookings has a new report out by Jonathan Rothwell, José Lobo, Deborah Strumsky, and Mark Muro that “examines the importance of patents as a measure of invention to economic growth and explores why some areas are more inventive than others.” (p. 4) Since I doubt that non-molecule patents have a substantial effect on growth, I was curious to examine the paper’s methodology. So I skimmed through the study, which referred me to a technical appendix, which referred me to the authors’ working paper on SSRN.

The authors are basically regressing log output per worker on 10-year-lagged measures of patenting in a fixed effects model using metropolitan areas in the United States.

\ln y_{i,t} = c + \beta_{1} \ln ( patenting_{i,t-10}) + \beta_{2} \ln ( Population_{i,t-10}) + \beta_{3} \ln ( y_{i,t-10}) + \beta_{4} \ln ( \text{predicted productivity}_{i,t-10}) + \beta_{5} \ln ( \text{educational attainment}_{i,t-10}) + \text{place and dummy variables} + \varepsilon_{i,t}

The model is structured in this relatively standard way to reduce endogeneity—there might be more patents filed where labor productivity is highest, rather than higher labor productivity where the most patents are filed. And if the only concern were reverse causality, then it would be a good way to study the question of patents and innovation.

The authors find positive coefficients on the patenting variables and conclude that patents drive economic growth both in local areas and in general.

This report documents how a strong national innovation system plays out across a dispersed array of U.S. metropolitan areas, contributing to economic growth in both local places and across a large and diverse country.

Clear in these pages is the continued vibrancy of the U.S. innovation as well as the general utility of the nation’s patenting system. (p. 28, emphasis added)

These conclusions are unwarranted given the model and findings expressed in the paper. To see that this is the case, assume temporarily that patents do nothing to incentivize real innovation, and that they merely transfer wealth from consumers at large to the patent holder through firm profits. If this were the case, then we would find that measured output per worker was higher in metropolitan areas with more patents—exactly what the authors found!—because they are gaining profits at the expense of consumers in metropolitan areas with fewer patents. In other words, the authors could be laboring under a fallacy of composition. Just because patents enrich the MSAs that generate them doesn’t mean that they are a source of prosperity for the nation as a whole or that they increase social welfare.

Alternatively, assume temporarily that patents do nothing to incentivize real innovation, but that firms that produce valuable innovations must defensively patent them to avoid being taken to court for using their own inventions. If this were the case, then patents would correlate with real innovation, and therefore with output per worker, but they would not cause an increase in productivity. In addition, at least some of the measured increase in output would come from an influx of highly-paid intellectual property attorneys, which by assumption does not represent real added productivity. Note that the top-patenting MSA in the study is Silicon Valley, the part of the country where people are most concerned about defensive patenting. But the word “defensive” does not appear even one time in the report, the appendix, or the working paper.

The authors have done nothing to identify the effect of patents on productivity, which is to say, nothing to rule out either of the possible assumptions above. They are simply relying on the assumption that more patents means more innovation.

This flaw in the paper makes all of their policy conclusions suspect. For example, if patents represent a mere transfer, then encouraging patent-generating institutions is socially destructive. It might nevertheless be rational for a single MSA to encourage such institutions, because residents of the MSA would enrich themselves at the expense of other MSAs. In this case, we should adopt federal policies to discourage patent-generating institutions. If patents merely correlate with innovation due to defensive patenting in some domains, then the U.S. patent system is not working as intended, which is again the opposite of what the authors conclude.

On point, the Winter 2013 Journal of Economic Perspectives is out this week, featuring a four-paper symposium on patents. The lead article is by Boldrin and Levine, entitled “The Case Against Patents.” Here is the first paragraph:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the “patent puzzle”: in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.

Petra Moser’s article does a historical comparison of countries with strong and weak patent laws and concludes:

Overall, the weight of the existing historical evidence suggests that patent policies, which grant strong intellectual property rights to early generations of inventors, may discourage innovation. On the contrary, policies that encourage the diffusion of ideas and modify patent laws to facilitate entry and encourage competition may be an effective mechanism to encourage innovation. (emphasis in original)

I hope that policymakers don’t rely on Brookings’s strong reputation and infer that our patent system is the strong engine of economic growth that Rothwell et al. suggest it is.

11 replies to “The Brookings Patent Report is Bogus

  1. Pingback: The Brookings Patent Report is Bogus

  2. Ellie K

    Thank you, Eli, for your write-up. I’m curious whether the Brookings Institute’s patent study was stratified by subject of patent. I’m thinking specifically of software patents. Although with the recent Apple-Samsung activity, I suppose certain consumer electronics would need to be separated too. I’m not sure how or where to draw the line.

    My point is that, perhaps, there may be some areas where patent law has not been subverted, i.e. such that defensive patenting and similar practices are not used, thus do not stifle innovation nor have other undesirable effects. In the past, I would not have grouped pharmaceutical patents with software. That has changed during the past decade or so.

    Final thought: You mentioned something I have not seen elsewhere, the increase in highly compensated intellectual property attorneys. I doubt they are so numerous, nor their earnings so great as to cause income distortion effects in MSA’s. However, “big law” is in decline with the single exception of IP law. It is the only growth area I have read about, in a long time.

  3. Eli Dourado Post author

    Hi Ellie,

    Table 2 and 3 in the Brookings report show some summary statistics for “subcategories” of patents, so the authors may be able to do some statistical work in the future on your question. However, I don’t believe they have published anything yet on the variation in the effect of patents across subcategories.

    I agree that an influx of IP attorneys is unlikely to be statistically significant by itself, only that it is one of several reasons that the authors need to be cautious about their measurements and model design. Your point that IP law continues to flourish is a good one.

  4. Jonathan Rothwell

    Eli,

    I believe your title adjective (“bogus”) and conclusion overstate the case considerably, but I do appreciate some of the thoughtful criticisms of the report I co-authored on patenting and economic growth. In response, I would like to clarify a few points for your readers.

    Right up front, I think it is important to keep in mind that our study aimed to examine the effects of invention rather than the effects of patents themselves. Hundreds of economic papers have been written that use patents as a proxy measure of invention (based on detailed firm and industry level analysis), so I think that is fairly uncontroversial.

    To your suggestion that we ignore defensive patenting and other abuses of the system, I would invite you to do more than skim our Brookings report (admittedly it is very long). We mention related concerns in detail and endorse reforms to the criteria for granting software patents (to stop patenting “functions”) and introduce a new proposal to deter trolling. Yet, the main purpose of the paper was to examine the role of invention in the economic growth of regions, not whether or not the patent system is perfectly designed (we explicitly say it is not) or whether open source or some other arrangement is a preferable model.

    To your substantial points on econometric method, I think you raise some important considerations in a clear and compelling way. Since patents (or inventions) cannot be randomly assigned to metro areas or countries, it is impossible to know for sure what their causal effect on growth is. Still, like you said, we tried to avoid endogeneity as best we could, and we acknowledge that we do not prove causality.

    Here is why I am much less concerned than you are that we mis-identify the causal relationship. Take your first suggestion that patents may represent wealth transfers from consumers to producers: That hypothesis is inconsistent with the following facts: Industries that patent more are the most competitive, as measured by low profits (see Juan Correa’s work); industries that patent more perform the most R&D; industries that patent more have experienced the lowest rates of inflation and some for some of the very highest patenting industries (communication, software, computer hardware, semiconductors) products have even become cheaper in recent years, according to the BLS Producer Price Index. Your second scenario, that the gains from patenting could be going mostly to patent lawyers (because of defensive patenting), is extremely unlikely and also inconsistent with the fact that GDP growth overall and per worker has been extremely high in high-tech industries (e.g. computer and electronics manufacturing, communications, pharmaceuticals, R&D services). Moreover, in a robustness check to our empirical work, we found that patenting is strongly correlated with productivity growth in high-tech establishments, which do not include law firms. Consider that metropolitan Corvallis OR, Burlington VT, Boulder CO, and Rochester MN rank near the top on patents per worker in our study, in addition to San Jose and San Francisco.

    Like many people, I worry about excessive litigation over intellectual property. I would be eager to promote reforms that maintain incentives to innovate while limiting such abuses. Perhaps, your blog covers some good ideas. I’m am open to suggestions.

    I will address some of the Boldrin and Moser issues in a future blog on the Brookings website. You should note that Moser’s 2005 article concludes that the US patent office shifted inventive activity towards manufacturing in the United States and raised economic growth. I guess she changed her mind.

    -Jonathan Rothwell

  5. Eli Dourado Post author

    Jonathan,

    Thanks for taking the time to reply. I will do my best to publicize your response to those that saw my original post.

    Two brief points of clarification:

    1. You are certainly correct that numerous other papers use patents as a measure of innovation, so perhaps it is somewhat unfair that I have singled your paper out. I believe, however, that this practice is becoming increasingly controversial as economists have become increasingly skeptical of patents. And, of course, my concern is that pro-patent interests will use the report and Brookings’s good name to lobby for more expansive protection or against reform.
    2. I now regret using the line about IP attorneys, because it was ancillary to the point I was trying to make and has proven a distraction. If inventors feel obligated to defensively patent every good innovation, then patents may be a good measure of innovation, but that innovation does not justify the patent system because patents are not causing innovation.

    Thanks again for the reply, and I look forward to your future posts on the Boldrin and Levine and Moser articles.

  6. Pingback: Bad Economics: Confusing Correlation And Causation When It Comes To Patents And Innovation

  7. Pingback: Bad Economics: Confusing Correlation And Causation When It Comes To Patents And Innovation | PickStuff

  8. wj

    Brookings paper: Patents are a proxy, a convenient measure, of innovative activity. I really don’t see advocacy of the U.S. patent system as being a part of the core thesis of this paper. There are, admitedly, peripheral statments suggesting the utility of the patent system, and to address these on a case by case basis is fair, but this overall paper is not the dog that need be hunted in regard to the worth of stringent intellectual property system. Again, that was not the purpose of the paper.

    If there was a valid critism to the core thesis of this paper, one which says that a regions inventiveness (not necessarily patent production–but that’s just a convenient measure) correlates with economic vibrancy, flourishing, and prosperity, it’s one which notes table 7 in the paper, noting the extraordinarily slow job creation rate of the Bay Area regions. This criticism can be easily brushed aside, though, since the unique physical and human geography of the Bay Area (scarce land, and extraordinrily high price of that land) prevents the possible economical hiring of workers who staff the lower and mid tiers of technical support and manufacturing for the various technological organizastions located there. Perhaps, it’s quite amazing that teachers, retail workers, and police still live in the region. What comes to mind is Khan Academy, robo-retail and robo cops in the Bay Area’s future.

    Incidentally, one might note examples of Khan Academy or Wikipedia as being open source technological platforms, among many, which have their core architecture and maintenance as being sourced in the SF Bay Area or Santa Clara Valley. So, if there were a good quantitative measure of this, let us know, and I know, one would still find that geography is of utmost importance, namely in the sense, that you need rich collaboration (face to face, in spite of online communication alternatives) all supported by capital intensive foundaries of intellectual knowledge (top tier University STEMD programs).

  9. wj

    I’m idiom challenged. I’m not for hunting dogs. (Especially offensive to my Bay Area friends.) Have fun y’all.

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