Tuesday, May 18, 2010

GUEST POST: The source of economic growth

Guest post by patent attorney and entrepreneur, Dale Halling.

What is the source of economic growth?  Trying times like these make this question even more important.  The chart on the right 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, when per capita income finally takes off (only true for western countries; for instance, African countries still have incomes near or below that shown 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.  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.[1]

Despite the overwhelming evidence for the connection between patents, technology and economic growth, some detractors argue that this is just the purest 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 still 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 the keystone upon which economic growth is built. 


[1] US Constitution, Article 1, Section 8, Clause 8.  Note the Bill of Rights are amendments to the Constitution.

Dale Halling is an American patent attorney and entrepreneur. Read his regular thoughts at his State of Innovation blog.  (This post originally appeared at the State of Innovation blog. It has been lightly edited and reformatted for clarity.)

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20 Comments:

Anonymous Anonymous said...

Great to see the defence of intellectual property as an integral part of the free market.

(Heaven knows the fight for freedom needs to balance out the anarchist line on this at mises.org, which represents the user and second hander society only.)

Cheers Mark Hubbard

5/18/2010 08:29:00 am  
Blogger Jeremy Harris said...

Current patents per head of population are dropping like a stone...

You should also replace the words "growth in technology" to "growth in energy use"... A similar but slightly different thing...

Study of the Solow Residual and the LINUX system of measuring imputs into economic growth should disabuse you of any notion contrary to the fact that growth in energy use (granted by technological improvements) is the main driver of economic growth...

The main point being, our machines are useless without the oil and electricity to run them and the patents then count for squat...

5/18/2010 09:16:00 am  
Anonymous LGM said...

Interesting article which does not make the case for patents (unfortunately). What has been provided on this occasion is a collection of assertions and a pretty nice hockey-stick graph (most reminiscent of the global warming strategy). As handy as the correlation central to the article may be, it does not make the case for patents. It does not demonstrate that patents are an expression of property rights (and not a government grant of prviledge or monopoly etc.) and that IP is (and actually can be) properly treated as property.

LGM

5/18/2010 09:45:00 am  
Blogger Luke H said...

For those libertarians who aren't so pro-IP, here's a Libertarian Nation article arguing that intellectual property "rights" are immoral monopolies granted by governments under threat of force, no better than a minimum wage or a tariff.

5/18/2010 10:44:00 am  
Blogger PC said...

@LGM: You appear to confuse facts with assertions and Mr Halling with Michael Mann.

FACT: Income has risen dramatically since 1800, and not every hockey stick you see is made up.

Does the article demonstrate that patents are an expression of property rights? No, it doesn't, because quite clearly it doesn't seek to.

What it does do is provide a compelling case that patents underpin technological improvement, and that technological improvement underpins incomes.

Which your actual argument you don't bother to address.

@Luke: I note that, ike LGM, you don't bother to address the actual argument made (I can only guess why.)

So, like his comment, yours too is off-topic--a topic that has already been well discussed here.

And since it's off-topic and you've posted a link to some other piece of trash, it's dangerously close to spam.

That said, intellectual property "rights" are not immoral monopolies granted by governments under threat of force, any more than the protection of any other legitimate property right represents the protection of a so-called monopoly. Their protection is simply the protection of what is a right.

“Patents on new inventions, copyrights on books, drawings, musical compositions, and the like, and trademarks and brandnames, do not constitute monopolies. True enough, they reserve markets, or parts of markets, to the exclusive possession of the owners of the patents or copyrights, or trademarks or brandnames, and they do so by means of the use of [the government’s] physical force inasmuch as it is against the law to infringe on these rights.
“None of these rights represent monopoly, however, because none of them is supported by the initiation of physical force. In all of these cases, the government stands ready to use physical force in defence of a pre-existing property right established either by an act of personal creation or by the fact of distinct identity.. .
“The fact that the government is ready to use force to protect patents and copyrights is fully as proper as that it stands ready to use force to protect farmers and businessmen in their ownership of their physical products [or once used to] and to come to their rescue when they are set upon by trespassers or attacked by robbers [or once used to].”
- George Reisman, ‘Patents and Copyrights, Trademarks and Brandnames, Not Monopolies,’ in Capitalism

“Congress, treatise authors, courts and scholars [now] agree that patents are a unique form of property that secures only a negative right to exclude others from an invention. . . The conventional wisdom is that … patents secure only a right to exclude . . .
“This claim is profoundly mistaken. For much of its history, a patent was defined by Congress and courts in the same conceptual terms as property in land and chattels, as securing the exclusive rights of possession, use and disposition.”
- Adam Mossoff, ‘Patents as Property: Conceptualizing the Exclusive Right(s) in Patent Law

5/18/2010 11:20:00 am  
Blogger Kimble said...

To a point.

Patents, if awarded too liberally, and with too great restrictions, will eventually stifle technological development.

5/18/2010 03:12:00 pm  
Anonymous Greg said...

"if"? "eventually"?

5/18/2010 06:12:00 pm  
Blogger Jeremy Harris said...

Interesting discussion...

I also think there is just as good a case for arguing the end of slavery drove the desire for mechanisism, just as much as the desire to utilise fossil fuels and the desire to profit from patents... The industrial revolution was due to a combination of factors...

5/18/2010 08:25:00 pm  
Blogger PC said...

@Jeremy: I think you have your causality, not to say your chronology, exactly backwards there.

5/18/2010 11:16:00 pm  
Blogger Jeremy Harris said...

The revolution is almost three hundred years old, many factors have driven it and continue to, it is a fluid thing... To attribute it to patents solely is, I think, simplistic...

5/19/2010 02:57:00 am  
Anonymous LGM said...

PC

You're quite the evader when it suits your purpose. What you've been indulging in is a little cheap smearing, presenting a few assertions, some cutting & pasting of quotes and engaging in a little exaggeration, all of which remains insufficient to make the IP case for you.

The position requires a non-trivial proof. So far it hasn't been provided. You certainly can't do it (as we are now both well aware). Indeed, your mode of behaviour is to dance around the fundamental issue, failing to engage it seriously or deal with it honestly. That's been going on for a while now (some months). I had thought you had more integrity.

There was this:
"What it does do is provide a compelling case that patents underpin technological improvement, and that technological improvement underpins incomes".

This is a contestable assertion at best- hardly a “compelling case”. We've previously discussed a situation where patents stymied technological improvement for decades. Perhaps your memory fails you and you accidentally forgot. Still, you might care to provide all the necessary proofs for your latest assertion set on your way to addressing the IP validation case proper. Should you seriously make the attempt you'll discover just how much has to be accomplished and how demanding that challenge really is.

Anyway, my position is not that patents, IP etc. are necessarily wrong (as has been claimed by one branch of libertarianism), or even that the case to validate IP as property can't be successfully made (despite that remaining a significant possibility), but that the case to validate IP as property etc. has not been properly made. It needs to be and I had hopes that it could be.

LGM

5/19/2010 07:31:00 am  
Blogger PC said...

@LGM: Once again, you've failed to address the post, and instead delivered another off-topic attack--this time including an attack on my integrity.

"The position requires a non-trivial proof. So far it hasn't been provided. You certainly can't do it (as we are now both well aware). Indeed, your mode of behaviour is to dance around the fundamental issue, failing to engage it seriously or deal with it honestly. That's been going on for a while now (some months). I had thought you had more integrity."

Well, I've made several arguments and pointed you to several more, all of which which you've chosen to ignore rather than to adequately address..


"We've previously discussed a situation where patents stymied technological improvement for decades. Perhaps your memory fails you and you accidentally forgot."

In fact, you raised an issue and made a claim which was dismissed. PLease go back and read the transcript.


"You're quite the evader when it suits your purpose."

How about you run away and play hide-and-go-fuck yourself.

PS: I would direct honest readers to comments on other posts here on Intellectual Property to see the veracity of these claims.

5/19/2010 09:35:00 am  
Blogger PC said...

@Jeremy: "The [Industrial] revolution is almost three hundred years old..."

Not quite. Most historians would place it in Britain either side of the Napoleonic Wars (making it around two-hundred years old).

"To attribute it to patents solely is, I think, simplistic..."

I can't speak for Mr Halling, but I don't see him making the argument that it is the sole reason."

5/19/2010 09:40:00 am  
Blogger PC said...

The post's author, Dale Halling, responds to the argument on "monopoly":

Monopoly: Unfortunately, the economic literature is littered with non-sense in this area. [Even] the honest economists will state that all property rights confer “market power” and therefore have monopoly aspects. This line of reasoning shows just how confused the economists are. If you look at the historical basis of monopolies, i.e., The Statute of Monopolies, it was designed to limit government power and ensure the property rights of citizens. The US turned this on its head with Sherman Antitrust Act.

http://hallingblog.com/2009/05/31/the-myth-that-patents-are-a-monopoly/.

5/19/2010 09:47:00 am  
Anonymous Dale B. Halling said...

Jeremy

Modern economics is fairly clear on the point that advances in technology are the only way to increase real per capita incomes.

The evidence does not support the point of view that you can have vigorous technological growth without a patent system as the charts above show. This does not mean you will not have any growth in technology just that it will be much slower. Historically this technology growth is so slow that it is less than the rate of growth in the population. Only when patent systems are introduced does this change.

In order to understand why this is the case think about the type of houses that are built when you cannot obtain legal title to the house or underlying land. Houses are still being built, but they are merely shacks unless you can obtain legal title to the house and land. The same is true of inventions. If you cannot obtain legal title to your invention, you end up with inventions that are the equivalent of shacks.

A book on point is Farewll to Alms, by Gregory Clark

5/19/2010 10:27:00 am  
Anonymous Dale B. Halling said...

PC,

Here is another point that may be of interest to your readers. I was asked the following question:

I meant to add one more point to my devil’s advocate argument about “market forces” being sufficient to propel innovation forward at an appropriate pace:
If you look back at the Supreme Court’s decision in KSR v. Teleflex, you will see that this is pretty much the argument they make, namely, that patents are not needed.
According to KSR, “market forces” alone may be sufficient to motivate an ordinary artisan to use his “ordinary creativity” to arrive at a new design (e.g. an electronic pedal design for an automobile) in which case the new design is not “nonobvious” but rather the inevitable outcome of market dynamics and ordinary craftsmanship, whereby a patent should never have been applied for in the first place or issued by the USPTO in the second place or validated by the CAFC in the third place.
Hence, the Supreme Court is basically saying in KSR that there are market segments (e.g. the thriving Detroit segment –sarcasm intended here) where those stinkin’ patents are not needed because the market has matured to the point where market forces and “ordinary creativity” are enough (to deliver onto us the failproof brake pedals that surely Toyota and others always provide –sarcasm again intended).
((Sorry, the devil’s advocate sometimes can’t help mocking his adopted master’s line of argumentation. Maybe somebody else can do it with more of a straight face than I.))

My response:

I understand you were not taking the Supreme Court’s side in this issue, but here is my response anyway.
I agree with you that this is what the Supreme Court is saying in KSR and it is based on their ignorance of history and their arrogance. There is no historical evidence of great technological spurts without an economic system that provides an incentive to invent. If you cannot obtain legal title to your invention or keep it a trade secret (or you have so much market power that you can overwhelm your competitors) then it is clearly an economic disadvantage to invest in inventions. Your research and marketing costs in creating a new product and new market clearly increase your cost of doing business over your competitors who do not spend money on new product development. Those countries that do not have patent systems or have weak patent systems are not leaders in technologic creation or technologic diffusion.
An analogous situation exists in the recording industry. While Mexico has copyright laws they are essentially unenforceable and meaningless. According to Pat Choate’s book, Hot Property, something like 96% of all music and video recordings in Mexico are pirated. Mexico has many talented musicians and being a top notch musician is not an expensive endeavor, however Mexico has no recording industry. Any talented musicians from Mexico who want to make it in the recording industry have to move to the US, where copyrights are enforcable. This is clearly not because Mexican’s are not talented musically or they cannot afford the recording technology, it is because they cannot obtain meaningful title to their creations.
The Supreme Court is wrong that market forces will push technology forward without a patent system – legal title to ones inventions. The other point the Supreme Court is missing is that we want people competing based on new technologies not on me-too products. The real advances in our standard of living occur not from reducing the price of existing products but by creating new products and technologies. Seehttp://hallingblog.com/2010/02/03/patent-and-antitrust-law/.

5/19/2010 10:37:00 am  
Blogger PC said...

@Dale: Your parallel with houses is well made.

As Hernarndo de Soto points out: when no secure title and rights exist, people tend to build their furniture before their roof.

Which explains the state of most of the world's barrios and shanty-towns.

5/19/2010 10:38:00 am  
Anonymous LGM said...

PC

The facts are that, despite the bluster and hollow assertion, you still have not made the case for IP as property. It is clear you are not intellectually up to the task, let alone comprehending the scope of what is required. You are well out of your depth.

The evasive dishonesty you display in regards to this topic eliminated whatever integrity you may appear to have had. To say the least, a surprising and disappointing development.

LGM

5/19/2010 04:41:00 pm  
Blogger PC said...

@LGM: If that's your considered opinion, then I look forward to not seeing you around.

5/19/2010 04:56:00 pm  
Anonymous Dale B. Halling said...

LMG,

The source of all property rights is Locke’s theory of Natural Rights. The historical justification of property rights are based on the right that a person owns himself. If you do not own yourself, you are a slave. If you own yourself then you own the fruits of your labor, physical and mental. Inventions are result of a person’s metal and physical effort. As a result, an inventor is the owner (patent) of his inventions. Using someone’s invention without their consent is no different than taking the apples in their orchard or the machine they built. The logical foundation of patents as a property right is the same as all other types of property. This is why the US Constitution talks about securing an inventors “rights”, Article 1, Section 8, Clause 8. By the way it is the only right defined in the US Constitution.

5/20/2010 03:08:00 am  

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