# 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.

# 5 Reasons TacoCopters will be More Important than Hoverbikes

In Forbes, the excellent Adam Ozimek agrees with me that TacoCopters—commercial drones that deliver goods—will be an important economic advance. However, he thinks that they will also cause some economic drawbacks, and that on balance, hoverbikes—like this one designed by Aerofex, but also other flying human transporters more generally—will be more important.

I’m not convinced. Here are a few reasons.

### 1. Most humans have legs

Adam leads off with an interesting point: “humans are just a kind of stuff, and there is no reason to think that quadrotors won’t move us around in the future too.” But there is an important difference between humans and stuff. Most humans have the ability and will to navigate the last few steps after you drop them off. This means that the margin of error for navigation (though not the margin of error for safety) is higher for human transport, whereas non-human cargo must be delivered literally to the doorstep.

A big part of the problem that TacoCopters are solving is this “last few steps” problem. There’s not an equivalence between solving it for stuff and for humans, because most humans don’t have a pressing need for it to be solved. I will concede that for disabled people for whom the last few steps is a challenge, wheelchaircopters would represent an important advance.

### 2. The marginal benefit of flying cars over regular autonomous cars is not that high

Let’s say you already have an autonomous car and you use it to commute to work. On your commute, you spend your time reading, catching up on Twitter, applying makeup, etc.—not driving. An autonomous flying car might save you a few minutes on your commute. But it won’t save you any time on net, because you will still need or want to read, catch up on Twitter, or apply makeup before or after you get to work. Because you were not wasting your time driving in the first place, a faster commute saves you almost no time.

Furthermore, even if we assume that the use of your commute time was suboptimal, regular autonomous cars will get us places faster than human-driven cars today. That is because they will be able to use vehicle-to-vehicle communication to drive together more closely, to coordinate intersections automatically, and to notify each other of any remaining traffic incidents. Flying—and especially hovering—simply won’t create that much of a gain for getting about town.

I think we are much more likely to use human-transporting drones in long-distance travel than in daily driving. There are a lot of moderately wealthy people who could afford a small private jet, but could not also afford to also employ a pilot full time. Drone technology will bring private jets into the realm of possibility for a higher percentage of the population. They will also be used in commercial air travel, but there, pilot salaries are not an enormous fraction of the cost.

### 3. TacoCopters will create way more employment opportunities than they destroy

Adam and I are both interested in the ZMP hypothesis—that a non-trivial fraction of unemployment is caused by the fact that some of the unemployed literally cannot be profitably hired, that they have zero marginal product. And we agree that it is likely to be an even more important hypothesis in the future; robots really might steal our jobs!

Although TacoCopters could put a few hundred thousand delivery men out of work, think of all the new business opportunities that they will generate. As Adam says, the world is not flat. But with TacoCopters, cities, at a minimum, would become flat. New enterprises would be able to open up in low-rent districts and, at very low cost, deliver goods to the entire metropolitan area. Even if it’s not literally the unemployed deliverymen who are starting these businesses, they could be hired in non-delivery roles by the new entrepreneurs.

Adam worries about the cultural effects of robots stealing jobs, and this concerns me too. But TacoCopters will lead to an entrepreneurial boom! And I think we can all agree that the cultural effects of an entrepreneurial boom are good, at least on net.

### 4. We may be screwed on the ZMP front anyway

If I am wrong about all of the new entrepreneurial opportunities that TacoCopters will create, it’s still not clear how big of a marginal contribution TacoCopters will make to our problems. If TacoCopters create a lot of ZMP workers, they will probably not be alone; other artificial intelligence technologies will create millions more. These millions of ZMP workers and others who sympathize with them will almost certainly vote them a basic income.

Now, it’s possible that ZMPers who formerly worked in the delivery sector could be the straw that broke the camel’s back. If, collectively, they were the deciding vote on a basic income, that could be a bad outcome. But the current delivery sector is not so large as to make this likely. I think that a likely outcome might be that the acceleration in ZMP unemployment caused by TacoCopters could enable a basic income to pass a year earlier than it might otherwise. While this is a negative outcome in Adam’s view (and mine), it is not that significant culturally for the negative shock to happen just a little bit sooner.

### 5. Hoverbikes face higher regulatory barriers—and consequently may never make it to market

In my last post, I expressed concern that regulation would unnecessarily delay the introduction of TacoCopters. Whatever the other merits of hoverbikes, they are likely to face even higher regulatory hurdles than TacoCopters. It’s only fair to discount the benefits of an innovation by the likelihood that they won’t materialize. And if consumer safety or other regulations are too onerous, hoverbikes might not just get delayed—they might get outlawed.

As Adam notes, I have bet him \$100 that he won’t own a Star Wars-style speeder by the end of 2020. This is a bet that I think I will win, but that I hope to lose. I think in general we are approaching a really exciting time in the high tech sector. We’ve had a lot of advances in computer engineering, both in hardware and in software, and we’re getting to the stage where a lot of those advances are yielding applications in new physical possibilities, not just new computer applications. While some of these new possibilities have downside risks, I think it’s important that we as a society continue to experiment rapidly. Legalize innovation.