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Is US Innovation Getting Stuck in a Thicket of Patents?
If technology is advancing crazy fast, why aren’t those advances showing up in the broader productivity and economic growth numbers? Or as economists Erik Brynjolfsson, Daniel Rock, and Chad Syverson describe this mystery in their 2017 paper “Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics:” “Systems using artificial intelligence match or surpass human-level performance in more and more domains, leveraging rapid advances in other technologies, and driving soaring stock prices. Yet measured productivity growth has declined by half over the past decade, and real income has stagnated since the late 1990s for a majority of Americans.”
But those researchers remain optimistic. “The breakthroughs of AI technologies already demonstrated are not yet affecting much of the economy, but they portend bigger effects as they diffuse.” And one possible role for policymakers is to remove barriers to the spread of productivity-enhancing technologies when possible. Which brings us to “What Happened to US Business Dynamism?” by Ufuk Akcigit and Sina Ates. From that paper:
Market economies are characterized by the so-called “creative destruction” where unproductive incumbents are pushed out of the market by new entrants or other more productive incumbents or both. A byproduct of this up-or-out process is the creation of higher-paying jobs and reallocation of workers from less to more productive firms. The US economy has been losing this business dynamism since the 1980s and, even more strikingly, since the 2000s.
The explanation Akcigit and Ates focus on is “declining knowledge diffusion in the economy” such that “market leaders are shielded from being copied, which helps them establish stronger market power. …When they face less threat, market leaders relax and they experiment less. Hence, overall dynamism and experimentation decrease in the economy.” (Though, to be clear, the researchers are not directly linking the dynamism issue to the productivity issue.)
And what is the mechanism here driving this decline in diffusion? Akcigit and Ates: “We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge.”
Finally, some advice to policymakers (bold by me):
Published in EconomicsThe findings of this paper also present a direction for both future research and policy design. As discussed previously, several channels could have distorted the diffusion of knowledge. A short list of candidates include globalization, regulations, the changing nature of production and the increasing use of data. In addition, our empirical investigation points to an intensified use of patents to deter knowledge spillovers and potential competition. Opening the black box of the nature of knowledge diffusion and determining the drivers of its slowdown are vital topics for future research in this direction. In terms of policy, the results suggest that the appropriate response to revive business dynamism should focus on post-entry distortions that impede competition between leader and follower firms. Such competition policy would not only affect incumbent firms, but also incentivize business entry through positive trickle-down effects.
It’s interesting that this is happening in the private sector at a time when academia is trying to improve knowledge diffusion by making sure our content is open access. You may have seen the recent move by the University of California to ensure that all of its output can be freely read.
I am an engineer that produces medical devices. We are encouraged to file as many patent disclosures as possible. The point is not usually to protect ourselves from someone else stealing our ideas. Most of our patents will never be developed by our company (I can’t own a patent, even if I develop the idea outside of work, per terms of my employment. The company owns any patents I develop). The point is to accumulate Intellectual Property (IP) wealth.
Patents have become trading cards. Your company has an idea for a product. An engineer in my company had the same idea, and we have a patent that blocks you from making the product. We don’t use the patent. If your company filed patents for every idea that has ever crossed the mind of any of your engineers, then you might have IP that I am interested in. So we make a deal. We trade IP, otherwise you pay $. Thus, IP is wealth. It is no longer there to keep others from using products you make, or intend to make.
The problem with patents is that they are allowed way too broadly, for things that patents were never intended to protect. For example, “business method” patents should virtually never be allowed; the whole idea of Amazon trying to patent “One-click” is ludicrous. They would be well within rights to trademark the term/words, in the context of on-line ordering. But a patent? Gikme a break (it was not allowed, BTW, a rare smart decision by USPTO).
Back when sound recordings were first developed, RCA was the only game in town, and determined to use patents to keep everyone else out of that space. Instead, Congress accidentally hit the right solution 100 years ago for the music publishing business- anyone could license the RCA patents for a reasonable royalty (essentially how IBM makes money on its large patent portfolio today; to save my blood pressure, I won’t talk about patent trolls), or record copyrighted songs for a set royalty. This is exactly the approach that should be taken to the 16 million tiny IT patents put there that the Big Boys spent millions in court fighting over. The biggest boys simply infringe, put their products on the market, and extend the court fights till the products are obsolete. The true innovators, the small start-ups with new ideas, can’t afford that, so they either fail or are bought up by Big Boys. This is not a recipe for a dynamic and innovating US economy.