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

This is unfortunate. Despite plenty of research showing that patents do not, in fact, lead to increased innovation (but rather increased patenting), many still assume that there's a direct linkage. Of course, it is true that many successful industries see high rates of patents, but there is evidence that patents tend to lag the actual innovation, rather than predate it. That is, once an area or industry is innovative and successful then everyone rushes in to get patents and try to extract their piece of the pie, often slowing down the pace of innovation.

So it's fairly disappointing that the Brookings Institution, which normally does pretty good work on these kinds of things has put out a study about patents and innovation, and appears to be confusing correlation and causation in saying that patents lead to innovation and even (more ridiculously) that areas that aren't doing enough patenting need to beef up their patents to increase innovation:

Metro areas that produce a lot of patents—and the inventiveness that that implies—are more likely to see above-average gains in population, productivity, jobs, and education, according to a report from the Brookings Institution, a nonprofit research and policy think tank. And the bottom fourth of metro areas, the ones that produce the fewest patents, could gain as much as $4,300 per worker over a decade if they amped up their patent production to match the top fourth.

“If we were able to get the roughly 250 metropolitan areas that do very little patenting up to the level of the 100 that do a great deal of patenting, we’d be richer in an extraordinary way,” says Jonathan Rothwell, a lead researcher on the study. “It would make really a huge difference to economic development.”

Since the report focuses on successful metro areas, it seems that there are many, many other factors that may have resulted in the successful economic situations in those areas, and those other factors may also have led to the increase in patenting. Assuming a causal relationship and (worse) suggesting that all other regions need to do is up their patenting, is a dangerously ill-informed suggestion. While the report claims to account for "reverse" causation, it appears to make little to no effort to really account for the many, many variables that are easy to observe in every day life that lead to a correlation between patents and economic output.

I'd been working on a response to some of the many methodological problems I spotted in the report, and it was growing ever longer and longer... and then I saw that Eli Dourado did a much better and more concise job of it in explaining why the report is bogus. Dourado points to two possible explanations for the correlation, neither of which are accounted for by the paper:

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 is a major major flaw in the paper. It seems to assume that a whole bunch of things that simply aren't seen by folks who actually work in the industry, and makes little to no attempt to account for those other variables. In the comments, the lead researcher on the paper, Jonathan Rothwell, tries to defend the paper, by saying (in part) that they're just using patents as a proxy on inventiveness, and the paper should not be seen as supporting patents or the patent system itself:

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.

Just because lots of folks do it, it doesn't mean it's right. But the bigger issue is that while he claims that the paper is not an endorsement of patents specifically or increasingly patenting activity, that's not what he's telling the press. Just look at the quote we have above from what he told the National Journal. He specifically is saying that we should boost patenting in other metropolitan areas, suggesting that it would make "a huge difference to economic development." In other words, contrary to his claims in the blog comments, when talking to the press, he's pretty clear that he believes there's a direct causal relationship between patents and economic development. Furthermore, if he really believed that, he should have disclaimed, publicly, the title of that National Journal article, which explicitly says that patents (not "inventiveness") "matters to economic and job growth."

Also... if the report really is about "inventiveness" and not "patents," perhaps the paper should not have been called "Patenting Prosperity." Just saying.

Brookings, of course, is quite well-established and respected, and you can bet that pro-patent-system folks will be using this report to claim that "more patents are better" and that any reforms that are designed to push back on bad patents or to start limiting the number of patents we issue, would be a bad thing. Even though the report does, in fact, contain some arguments in favor of limiting certain types of patents and patent system abuse, those nuances will undoubtedly be lost. This report is going to get cited repeatedly as "evidence" that we need more patents and stronger patents, despite the fact that the actual evidence says no such thing.

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