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Policy Solutions to the Productivity Growth Crisis

In the past decade, economic growth, wage growth, business investment and productivity growth have declined dramatically. Economists have discovered that productivity growth alone explains the dramatic development of industrial economies. Yet, the causes of productivity growth are unclear, with capital, labor and technological contributions. Economists offer a number of theories involving exogenous growth theory, endogenous growth theory and evolutionary growth theory to explain the phenomenon of productivity growth and its centrality to economic development. The essential ingredient of productivity growth is total factor productivity (TFP), which represents an intangible collection of intellectual human attributes that we designate as technology innovation. Macroeconomic theories, however, fail to adequately represent the source and mechanisms of the decline in productivity growth and in TFP in recent years. The present article suggests that there are two main sources of the dramatic declines in productivity growth and TFP in the past decade. First, the U.S. patent system has been substantially degraded. Second, the competitive configuration of the technology industry has become highly concentrated. The combination of the reduced competition from the oligopolous configuration of technology incumbents with reduced patent rights for market entrants shows a mechanism for the decline in investment in innovative R&D that has been the engine for economic growth for hundreds of years. The patent system has been attacked by radicals on the left and the right. On the right, incumbents seek to protect monopoly profits. On the left, progressives attack the property right in a patent in order to seek a public interest benefit to innovation research. As these critiques have influenced patent policy, patent law has been cabined into a narrow scope which only benefits wealthy companies through dramatic increases in enforcement transaction costs. In a weak patent regime, there is limited enforcement of patent rights. For instance, large technology incumbents may engage in efficient infringement in which they infringe others’ technologies until they are caught, typically many years later, and then only pay a nominal fee that they otherwise would pay if they negotiated a license. Without strong patent enforcement, there is no incentive to invest in innovation, either by incumbents that can infringe with impunity or by market entrants that cannot reasonably enforce their patent rights. The weak patent system, combined with the oligopolous technology market configuration, explains the declining investment in technology R&D even as technology incumbents realize record profits and enjoy historic cash hoards. These policy factors explain the recent dramatic drop in productivity growth, the slowest economic recovery in about a hundred years, slow wage growth, weak business investment and the general discontent that is shaping politics. If the causes of weak productivity growth involve government policies – patent policy and competition policy – we can modify the policies to restore growth. In many cases, these policy prescriptions are simple to implement and may provide dramatic catalyst for economic growth.