The Patent Ideology of Jim Pethokoukis

The fact that AEI's Jim Pethokoukis moves seamlessly between contradictory beliefs when necessary to reach his preferred conclusions is, by now, well-established. But his post at AEI yesterday featured what is probably the most bold example of such behavior.

The genesis of the post was a response to a post I wrote pointing out that Nordic countries, despite having much higher tax levels and much more generous public benefits, have levels of growth, innovation, and entrepreneurship that are comparable to the US. In response, Pethokoukis copied and pasted one of his favorite bits of blog text that supposedly shows otherwise:

For a different view, here are economists Daron Acemoglu, James Robinson, and Thierry Verdier from their paper “Can’t We All Be More Like Scandinavians?”:

We cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism. … Some countries will opt for a type of cutthroat capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism.

I remember exactly when this working paper came out because it was the laughing stock of the economics blogosphere for a while. Why was it so mocked? Because it determined that the US was more innovative than Nordic countries by counting the number of patents filed per capita. The assumption here is that more patents is correlated with more innovation. This is a questionable assumption in any climate, but it's made totally silly by the fact that the US patent system is widely seen as being out of control.

One of the more biting criticisms of the general idea that patent rates are a reliable indicator of innovation came from an AEI scholar by the name of Jim Pethokoukis. In a post titled "How the US patent system is strangling US innovation" from November of last year, Pethokoukis shares with his readers this graph that shows how US patent rates have gone through the roof lately with little to show for it:

After sharing the graph, the next two sentences written by Pethokoukis are literally:

Do you see a positive correlation between more patents and more innovation in the above chart? I sure don’t.

From there, he goes on to rehearse the emerging consensus view that the explosion in US patents is not because of an explosion in innovation, but rather because the dysfunctional patent system is incentivizing patent trolling, among other things, and that this is actually harming innovation.

So let's review. New Pethokoukis claims that higher US patent rates relative to the Nordics show that the US has higher innovation levels than the Nordics. Meanwhile Old Pethokoukis of a few months ago claims that higher US patent rates are not an indicator of more innovation, but rather a dysfunctional US patent system that is out of control. How can he possibly believe both things? This might seem at first like a head scratcher, but I've found it's an easy puzzle to solve if you just assume Pethokoukis' beliefs about the meaning of higher patents are based solely on whatever economic policy conclusion he is trying to reach.

Who Is More Innovative Really?

Generally, I view efforts to measure innovation with a skeptical eye for the same reason that I view Heritage Foundation's Economic Freedom index with a skeptical eye: it's a highly contestable concept that doesn't strike me as the kind of thing availing itself of quantification. I am more open to the idea that you can see the effect of innovation in per-capita GDP growth, but as we know, per-capita GDP growth is similar in the Nordics and the US.

With that caveat out of the way, what might you do to try to peek in on innovation directly? Supposing you were really commited for some reason to using patents as an indicator of innovation, here is an idea some clever Finnish economists had: instead of looking at domestic patents or patents filed only in the US, why not look at so-called "triadic patents" that are filed simultaneously in the US, the EU, and Japan? That seems like it might sidestep the issue of the US patent system being extremely dysfunctional. Well here is what that looks like:

Here is another zany idea: maybe look at business expenditure on research and development as a percent of GDP?

Maybe even venture capital as a percent of GDP?

Again, I remain skeptical of the idea that innovation can be directly measured. But one does have to wonder: why, if their heavy taxes and big welfare benefits make the payoffs to innovation intolerably low, do Nordic countries have comparable and even higher levels of business research and development, more venture capital, and (as pointed out in my prior post) higher start up rates? Maybe the research and development is all being spent on researching how better to use venture capital to create start ups whose business it is to steal all those great US innovations. But, also, maybe not.