Intellectual Property as a cause of American Prosperity?

by Stephan Kinsella on December 15, 2012

Arguments for IP are notoriously confused, hypocritical, inconsistent, incoherent, vapid, and all over the map.¹ A recurring error is the correlation-equals-causation fallacy. Fore example: postwar Japan prospered because it had a patent system;² countries with the most IP are the most prosperous;³ America’s prosperity and growth since its inception is due to its patent and copyright systems.⁴ As I noted previously:

This proves absolutely nothing, in fact, except that there can still be growth despite state intervention such as intellectual monopoly grants. Correlation is not causation. I hope Obama doesn’t see this–I’m sure he could whip up a similar chart correlating growth over the last two centuries with, say, increasing taxes, increasing federal spending, increasing federal size/employment, increasing military size, increasing efficiency at mass murder, and so on.⁵

The latest entry is in an article in City Journal by Guy Sorman (h/t Redmond Weissenberger), A Brief History of American Prosperity. Sorman writes:

Worry over America’s recent economic stagnation, however justified, shouldn’t obscure the fact that the American economy remains Number One in the world. The United States holds 4.5 percent of the world’s population but produces a staggering 22 percent of the world’s output—a fraction that has remained fairly stable for two decades, despite growing competition from emerging countries. Not only is the American economy the biggest in absolute terms, with a GDP twice the size of China’s; it’s also near the top in per-capita income, currently a bit over $48,000 per year. Only a few small countries blessed with abundant natural resources or a concentration of financial services, such as Norway and Luxembourg, can claim higher averages.

America’s predominance isn’t new; indeed, it has existed since the early nineteenth century. But where did it come from? And is it in danger of disappearing?

By the 1830s, the late British economist Angus Maddison showed, American per-capita income was already the highest in the world. One might suppose that the nation could thank its geographical size and abundance of natural resources for its remarkable wealth. Yet other countries in the nineteenth century—Brazil is a good example—had profuse resources and vast territories but failed to turn them to comparable economic advantage.

A major reason that they failed to compete was their lack of strong intellectual property rights. The U.S. Constitution, by contrast, was the first in history to protect intellectual property rights: it empowered Congress “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” As Thomas Jefferson, who became the first commissioner of the patent office, observed, the absence of accumulated wealth in the new nation meant that its most important economic resource was innovation—and America’s laws encouraged that innovation from the outset. Over two centuries later, the United States has more patents in force—1.8 million—than any other nation (Japan, with 1.2 million, holds second place). America is also the leader in “triadic patents” (that is, those filed in the United States, Europe, and Asia) registered every year—with 13,715 in 2009, the most recent year for which statistics are available, ahead of Japan’s 13,322 and Germany’s 5,764.

Notice that there is no argument whatsoever here to justify the assertion being made. The argument here assumes that innovation is critical to prosperity and economic development—true enough—and then correlates patents with innovation. But not only is this correlation problematic—not all patents are innovative and not all innovation is patented⁶ —but even if patents are correlated with innovation, correlation does not prove causation. It is equally as plausible, in fact more plausible, that innovation persists despite, not because of, a patent system.

As economist Fritz Machlup concluded in an exhaustive 1958 study prepared for the U.S. Senate Subcommittee On Patents, Trademarks & Copyrights:

No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society. The best he can do is to state assumptions and make guesses about the extent to which reality corresponds to these assumptions. … If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one.

(For more on this issue, see The Overwhelming Empirical Case Against Patent and Copyright.) The US is trying to export to the rest of the world its fascist, protectionist, mercantilist IP laws, along with its approach to antitrust, terrorism, taxation, monetary policy and the like. Libertarians should not fall for the groundless assertion that unlibertarian policies of the US state are the reason for its economic prosperity.