Intellectual Property and the Nobel Prize

It is not often that there is a link between intellectual property law and the Nobel Prize in Economics. This year, however, that link is explicit and hopefully will help re-shape the debate.

The 2018 Nobel Prize in Economics was awarded to William Nordhaus and Paul Romer. The prize was divided equally between Nordhaus "for integrating climate change into long-run macroeconomic analysis" and Romer "for integrating technological innovations into long-run macroeconomic analysis." While much of the media has correctly focused on the climate change issues in the work of Nordhaus, equal attention should be paid to Romer’s work as it related to Intellectual Property.

Much of the current debate in the patent world has been shaped by the patent troll narrative. Whether or not that issue needs further attention, it has played an outsized role in the debate and many argue has pushed the US to significantly weaken the patent system. This should concern every politician and citizen since Romer’s work confirmed the criticality of protecting intellectual property in economic growth. In fact, the fundamental contribution of Romer’s work was to qualitatively link technological advances to macro economics. From the Nobel announcement:

Romer demonstrates how knowledge can function as a driver of long-term economic growth. When annual economic growth of a few per cent accumulates over decades, it transforms people’s lives. Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations.

Romer’s solution, which was published in 1990, laid the foundation of what is now called endogenous growth theory. The theory is both conceptual and practical, as it explains how ideas are different to other goods and require specific conditions to thrive in a market. Romer’s theory has generated vast amounts of new research into the regulations and policies that encourage new ideas and long-term prosperity.

Romer’s papers put forth the idea that governments could promote technological development by investing in R&D and creating laws that properly reward innovation. The argument is that these differences in policy help explain the differences in economic growth. From the Popular Information publication:

To summarise, Romer showed that unregulated markets will produce technological change, but tend to underprovide R&D and the new goods created by it. Addressing this under-provision requires well-designed government interventions, such as R&D subsidies and patent regulation. His analysis says that such policies are vital to long-run growth, not just within a country but globally. It also provides guidelines for policy design: patent laws should strike the right balance between the motivation to create new ideas, by giving some monopoly rights to developers, and the ability of others to use them, by limiting these rights in time and space.

The recent changes to the US laws, including those to Section 101, raise the question of whether the US has now essentially eliminated any protection in certain spaces that are at the core of our current technological revolution. Many argue that innovation will occur regardless of the protections offered by the government. Those people are now arguing against a Nobel Prize winner in Economics.