Crisis Innovation

That is the title of a new working paper by Tania Babina, Asaf Bernstein, and Filippo Mezzanotti, here is the abstract:

The effect of financial crises on innovative activity is an unsettled and important question for economic growth, but one difficult to answer with modern data. Using a differences-in-differences design surrounding the Great Depression, we are able to obtain plausible variation in local shocks to innovative ecosystems and examine the long-run impact of their inventions. We document a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—independent inventors. Parallel trends prior to the shock, evidence of a drop within every major technology class, and consistent results using distress driven by commodity shocks all suggest a causal effect of local distress. Despite this negative effect, our evidence shows that innovation during crises can be more resilient than it may appear at a first glance. First, the average quality of surviving patents rises so much that there is no observable change in the aggregate future citations of these patents, in spite of the decline in the quantity of patents. Second, the shock is in part absorbed through a reallocation of inventors into established firms, which overall were less affected by the shock. Over the long run, firms in more affected areas compensate for the decline in entrepreneurial innovation and produce patents with greater impact. Third, the results reveal no significant brain drain of inventors from the affected areas. Overall, our findings suggest that financial crises are both destructive and creative forces for innovation, and we provide the first systematic evidence of the role that distress from the Great Depression played in the long-run innovative activity and the organization of innovation in the U.S. economy.

Further data coming your way…


Paging Ray Lopez...

Finally! Winter is over...

Bonus trivia: long term, what is the ONLY driver of GDP (level) in the Solow equation? Not taxes. Not savings. Not productivity. Inventions. Think of it this way: in Ray's ideal world, inventions are endogenous not exogeneous (like Solow's model) and so you can "invent" innovation, and accelerate GDP to record levels (rather than wait, since, in theory, if you wait long enough GDP will be at any level, even a poorly managed country with slowly rising GDP could in theory after say 100 years equal the GDP of a dynamic country at present). So in 50 years of "Ray Time" you can get to the Kurzweil Singularity rather than wait for "business as usual" innovation, which might take much longer (where Good Samaritan nerds invent largely for the fun and the societal praise, which is today's model; recall most inventors get nothing but a small bonus from their employer for inventing something). Can't dumb it down for you anymore than that, Brian. Thanks for reading.

Anyone who doubts Ray's description of employer treatment of brilliant inventors should read up on the Nichia Blue LED case.

You may also find my recent paper with Can Sever of interest. We examine a large cross-country sample (1976-2006) of patenting outcomes, which includes many crises in many countries. We find that financial crises, specifically banking crises, result in long-lasting declines in patenting for industries more dependent on external finance. In contrast to the above, we also find that citations also persistently fall, while average patent quality remains unchanged.

As an engineer, I wonder how these various fields depend on tooling or support services. There were big changes between 1976 and 2006. Computer science is an easy one to cherry pick, but look at the drastic changes in those years. And 1976 you probably needed a computer room to do serious research. By 2006 all you needed was a "notebook."

A 1976 programmer probably would have been boggled that the term "notebook" could become shorthand for 64 bit computer systems.

"We document a sudden and persistent decline in patenting by the largest organizational form of innovation at this time—independent inventors."

"Over the long run, firms in more affected areas compensate for the decline in entrepreneurial innovation and produce patents with greater impact."

Patenting is expensive. In down times people have less money. And so, a higher filter is used on what is "patentable."

A specifically relates to this emergency, I bet a lot of creative introverts are having a grand old time at home right now.

(I managed to design a useful thing in FreeCAD. Don't really have a practical need for it, but it's a fun skill to have.)

Very interesting. The quality increasing would be expected as many of the patent applications by the second tier innovators became effectively unemployed.

We presently are creating a large number of patents that are really "obvious to a Practioniser of the ART" that make good statistics with no significance.

Meanwhile or regulatory bureaucracy is slowing and stopping innovation, even while COVID-19 is raging. For example, the FDA, CDC, etc. have regulations that require single-use of personal protection equipment (PPE) by health care and medical laboratory workers. Making PPE disposable eliminates the bureaucratic problem of deciding which pathogens require which procedures for sanitation (very complex problem). Just autoclave everything, but that destroys N-95 masks.

This virus is temperature sensitive and can be inactivated at 60ºC for 30 minutes in a home oven, toaster oven, sauna, clothing dryer, or anything that will heat it to greater than 140ºF and much less than the 250ºF autoclave temperatures. This less than autoclave temperature sanitization process won't work for anthrax but SARS-CoV-2 is not the same. Only the regulations are the same and that has created a PPE shortage.

If you're asking hospital workers to take their gear home and decontaminate it, you're asking two things:

They absolutely expose their kitchen on the way to the oven. It is possible some but not all have suitable washer and dryer in the garage. Etc.

And you are asking that they know and understand their appliances potential for decontamination.

And so some administrators might take the position that second rate disposable gear is lower risk overall.

Not to mention the risk of Burning Down The House with clothes in the oven.

Another book on innovation in the 1930s was 'A Great Leap Forward'. The 1920s were driven by electrification of god damned everything. Small high torque motors rebuilt the factory floor, drove small appliances and enabled tabulating machines and calculators. Feedback control dramatically changed everything, e.g. coking ovens could be run safely and continuously. By 1930, a quarter of the workforce was obsolete and demand collapsed, but innovation continued in the 1930s. The story tellers like dramatic inventions, but it is the little ones like improved paint chemistry, improvements in synthetic fabrics, thermostats, freeze drying and the like that add up to a revolution.

(A good example is the modern notebook. The basic idea, flat screen, keyboard, trackpad, network and so on were all fleshed out by the early 1970s. Then came the incremental innovations over the decades with laptop computers in the mid-1980s, touch screens in the 1990s and internet - technology circa 1970 - in the 2000s. It often takes 30-50 years from a technological proof of concept to everyday product. Look at interchangeable parts.)

One big change in the 1930s was the rise of the industrial research lab after Edison's model. People recognized the problem of patents, the Wright brothers strangled US aviation just as Watt delayed the rise of high pressure steam. Marconi wanted radio to succeed, so he invented the patent pool in the 1920s.

There was also a certain tolerance of patent piracy. Cheap radios, called jalopies, put out by small outfits were tolerated on the grounds that they were crappy, but helped build a demand for better radios. Of course, no one would admit this out loud lest they be bitten by corporate counsel.

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