Economist Explains How Much Innovation Is Being Held Back: Says We Need To Fix The Patent System

from the some-metrics dept

On a recent episode of Jerry Brito's Surprisingly Free podcast, he had on economist Alex Tabarrok who recently released a Kindle short, called Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast. Part of the key argument in the book is that through bad policy, we've really held back the pace of innovation. This is something we've pointed out before, but Tabarrok has some data to back it up. One of the most frustrating things for us has been how many reports use patents as a proxy for innovation, even as many studies have shown no correlation between patents and actual innovation. In this book, Tabarrok, smartly, looks at the growth rate in Total Factor Productivity -- which is a measure of output that comes from "non-traditional" inputs -- i.e., output created directly from land or capital. This is a reasonable way of measuring the impact of technological improvement.

It's important to understand this, so let's take a step back to explain it a little more clearly. Economic growth comes from the ability to get more out of the same amount (or even better, getting more from less). Straight output increases can come just from increasing capital or increasing labor, but you're not expanding the overall pie. Actually creating economic growth -- providing more than was possible before -- comes from knowledge and ideas being applied to various problems. Knowledge and ideas can effectively create something from nothing, or create something more from something less. Greater and greater efficiency can be driven by smart ideas over time (mass production, automation, computerization, etc.), allowing for economic growth and the ability to create some amazing new things and expand the economy.

Total Factor Productivity is effectively measuring this point: how much are we getting from the factors of production. Over time, Total Factor Productivity should continue to rise, as we improve efficiency and create new things and generally grow the overall pie. But it's the rate of growth that is most important in determining if we're growing at an optimal pace. If the rate of growth of TFP is slowing, then that suggests something is getting in the way: and that's exactly what Tabarrok is talking about. Over the last few decades, rather than expanding, the growth rate for TFP has been declining. Innovation is still happening, and we're still growing the economy, but not at the same pace as in the past, and that's a problem, since normally we should see the rate of growth increase as well.

In short, as Tabarrok points out, we're seeing important growth and innovation happening later than it likely would have otherwise, if current policies weren't holding back economic advancement. He notes that if the pace of growth in TFP had continued at the rate it had in the two decades after World War II, we'd be living in a world of innovations from 2076, rather than what we have today. In other words, the pace of innovation has slowed down so much in the last 40 years, that it will take another 65 years or so just to get to where we should be today. That's terrible.

Among the things to blame? Obviously: the patent system is at the top of the list. We've certainly been down this road before, but Tabarrok hits on many of the points we have concerning how patents hinder the pace of innovation. As you may recall, a few months ago he actually put together a nice video on the topic as well. The key point: patents serve to make follow-on innovation much more expensive, and follow-on innovation is often key to continued productivity gains.

Brito asks him about one of the key retorts we often hear, noting that we do see plenty of innovation, and even the areas where there are the biggest patent fights, such as the smartphone patent wars, involve a bunch of companies -- mainly (though not entirely) in the US, leading the innovation. Tabarrok points out that, again, the real issue here is the rate of growth, not the fact that there is innovation happening:

You have to think about where is innovation most likely to be slowed by the patents. And it's actually in a field in which the natural rate is quite high. Suppose we have a field where the natural rate of progress is low and something is patented. Well, since the rate of progress is low, you're not raising the cost to future innovators very much, because they were going to wait anyway, because there wasn't much to build upon. So industries where you're not building on top of other innovations, where you don't have cumulative innovation, then a strong patent is not going to do very much. It's not going to slow things down.

It's precisely the areas in which there's lots of innovation, where you're building on previous innovations and things are moving rapidly, that the patent does slow things down. So, yes, it's true that the smartphone industry is innovating, rapidly. But it's my belief that they're innovating less rapidly than they otherwise would. And it's precisely in fields that are innovating rapidly that you expect patents to have the worst effects.

This a key point that is all too frequently misunderstood by patent system supporters. Even in the US government, where we've pointed out that they use incredibly simple claims of correlation, like Steve Jobs getting patents as proof of a patent system working. But that has nothing to do with the pace of innovation. It's that second-order number that is what is actually important in determining if we have the most effective policy. It's honestly tragic how few people understand the importance in understanding the rate of change in something, rather than its absolute rate in looking at the impact, and it's that failure to understand this (don't we teach calculus any more?) that has resulted in some really bad policy decisions.

Tabarrok discusses the patent nuclear war in the smartphone space and points out, as we have in the past, that it has nothing to do with innovation at all, but is just moving money around, mostly to lawyers. Even worse, he notes that the truly disruptive and breakthrough innovations tend to come from outside the big mainstream players, but rather from small upstarts coming out of left field -- but in a heavily patented area, those players don't stand a chance, and those breakthrough, epoch-defining innovations that move the entire state of the art vastly forward, die an untimely death, often before ever seeing the light of day. As he notes, those innovations get killed in a court of law, rather in the marketplace, which is terrible for innovation.

In terms of solutions to this issue, Tabarrok suggests getting rid of software patents first of all. Also, he suggests different patent lengths for different types of inventions, with shorter inventions for those which cost less to develop. I've seen this suggestion made before, and I'm not against it, though I do wonder about the unintended consequences there. If you're providing patent lengths based solely on "cost of development," you've now created perverse incentives for inventors to spend more on invention than might otherwise be necessary, as they attempt to get the longest possible patent. We should want the invention process to be efficient as well, including seeking to minimize the cost of development where possible. Developing things cheaper is, in fact, one key area of innovation. So while I appreciate the concept behind the idea, I'd be worried about such a system having significant consequences that might, in fact, slow down innovation even further.

Tabarrok does, however, suggest an alternative way of determining the length of a patent that might avoid some of the unintended consequences above: letting companies self-select, based on certain trade-offs. For example, he suggests changing the level of scrutiny and the time to get a patent based on what length patent you're seeking. So, if you want a 20 year patent, then it's going to get tremendous scrutiny, a careful look at the prior art and a detailed look into whether the invention passes the non-obviousness test. However, if you're willing to just take a three year patent, then the standard of review is much lower, and the patent is granted much more quickly. For those innovating in rapidly changing fields, you could see them choosing this option, knowing that they'll get the patent faster, and that by the time the patent expires, the world will likely have moved on already.

Brito also makes what I believe is a mistake in suggesting (as Tabarrok implies) that where the cost of investment is higher, you necessarily need greater inducement to do the investment. Again, I appreciate where both are coming from, but I believe this is based on a false premise, that in order to innovate, innovators need a special extra inducement to invest. Studies have shown that this is rarely the case. Inventors invent most frequently not because of the inducement of a patent system, but (a) because they need the invention themselves and (b) because they see a market need, and recognize they can recoup the investment and more in the marketplace through selling a good product. Starting from the place of believing that innovators need "inducement" when the market and basic needs may already provide such incentives seems to fall into the trap of believing what patent system supporters always claim: that the patent system is necessary for such inventions and innovations.

This post is long enough, but the podcast (and the book) goes on to talk about some other policy issues that are important for encouraging greater innovation: fixing our incredibly broken education system and also fixing our broken immigration policy towards high-skilled labor. These are both issues that we've discussed around here as well, and Tabarroks' views are quite interesting, and worth checking out.

Filed Under: alex tabarrok, innovation, pace of innovation, patents, total factor productivity

Awesome Stuff: Maybe Awesome, But More Info Needed

from the maybe-awesome dept

Given July 4th yesterday, we're taking an extended holiday today as well. We normally post our weekly awesome stuff post about cool crowdfunding campaigns on Saturday, but with the extra off-day, we figured we'd post this one on Friday. Enjoy.

Last week's awesome stuff post was about ambitious projects, which generally meant really "big" projects that others were trying to build. This week's set of projects were all ones I'd considered for last week, but they're "ambitious" in a different way. While the projects we discussed last week were big centralized things with no "products" going to the supporters, the three projects this week are all for products. But the reason I classified them as "more info needed" and possibly ambitious is that they all seem a bit "out there" and my gut reaction on all of them was, "well, that could be cool, but it would help if there were a lot more info..."

• First up, we've got The Cardboard Bike. It is exactly what it says. The design is really quite impressive looking, though there's little to no information beyond that: how well does it ride? How durable is it? In fact, the project's main video is much more about how the two guys who teamed up to do this have a vision of building all sorts of things out of cardboard and "changing the world" with cardboard. It's a lovely vision, but... it seems like they skip over the first part, about convincing people that the product they're offering, the cardboard bicycle, is actually worth buying. They just keep talking about how cardboard is a "game changer" for building anything. That might be true, but if I'm buying a cardboard bicycle, convince me that the cardboard bicycle makes sense first. They admit that the whole reason they build one in the first place was because everyone said it was impossible, but then they don't explain how they get past the limitations of cardboard. They just leave you wondering. So... more information needed. They're also asking for an insane amount: $2 million. Not surprisingly, they're nowhere near that, and are closer to $30,000, though it's an IndieGoGo Flex Funding campaign, so they'll get the money even if (when) they fail to hit the target. Also, if you buy the cardboard bicycle, they say they won't ship until March of 2015. That's a long time to wait... and it suggests that the reason there's so little info is they still have a lot to figure out in terms of how to actually build this bicycle. Still... it looks cool, and it is a potentially awesome project.
• Next up, is the Wie-Phone, which they claim is the "perfect" phone. It supposedly does amazing things like providing "free communication worldwide." Their pitch says: "Free as anywhere, anytime. Free as no charges, fees, subscriptions or pre-paid cards, no roaming fees, no data plans." But they don't explain how. That seems like a massive giant question mark. They just say: "We are sorry that we cannot disclose details how everything functions, but we have to protect ourselves." That always sets of warning bells. Often (though, not always) when companies are totally secretive about key aspects of what they're selling, and claim to have done something amazing, it means that they're missing something big -- something that people would tell them if they'd just share.
  
  The phone's "design" looks potentially interesting, with things like four cameras (two front, two back) that allow you to do 3D photos and video, identical buttons on the top and bottom (so it's never "upside down") and a few other things look potentially neat as well -- but it's all renderings. No actual product. Another set of alarm bells go off. The creators claim to have built amazing phones in the past, but they can't show an actual prototype here -- just a rendered design. That's great, but it gives no suggestion at all about their ability to actually make the phone. A rendering is great, but getting from rendering to actually built involves an awful lot of challenges, and many of those challenges could necessitate big changes in the design and functionality, and they give no indication that they're aware of this. Also, it's pretty difficult to decide to buy a smartphone when you can't even see what the final design looks like. This project set a target of $225,000, but it appears that the lack of details, specifics or an actual device has kept people from being interested. At the time I write this there were less than 20 buyers and just over $2,000 raised. It is an IndieGoGo Flex Funding campaign, so they'll get the cash either way, but if they only end up with a few thousand dollars, will they ever actually be able to produce anything? More info needed...
• This last one may be the least speculative of the three projects. It's GlassUp, an augmented reality set of glasses. If that sounds like the infamous Google Glass, you're right -- though their design and focus is somewhat different. Also, kudos to the creators of GlassUp for addressing the Google Glass issue head on, pointing out that they were well into designing the product when Google announced Glass, but decided to plow ahead anyway. They highlight the differences, including that GlassUp is more a notification-only type device -- so seeing info, text messages, email, etc., and it doesn't have a camera for recording (so you don't have the "privacy" fears of Glass). Still, it does seem like there's a lot of information needed. It's not quite clear how these glasses work -- and the images mostly seem to place the glasses strategically at an angle where it's difficult to see the main data mechanism and what that part looks like, which could have a big impact on how natural these glasses actually look. They claim that they're still working on the final design, and promise that it will be small and look great, but... it would be nice to actually see what you're getting. This one is looking for $150,000 but just has a little over $6,000 as I write this. As with all of the projects in this post, it's an IndieGoGo Flex Funding project, so they get the money no matter what. Again, it's unclear what happens if they end up with so little money. Do they still go to production? Still, if you're looking for an augmented reality pair of glasses, and are willing to take on the risk, but don't want to shell out the $1500 that is the current asking price for a developer's version of Google Glass, perhaps you might want to check these guys out and see if you think it's worth the risk.

Ambitious projects can be great, but they also can fail spectacularly. All of these projects could be awesome, but they also might never actually deliver a product. To some extent, that's always the risk with any crowdfunding project (some big ones have failed, and many others have been delivered much later than expected). However, when projects have this many questions at the beginning, supporters need to have a high tolerance for risk and the potential lack of payoff.

Filed Under: augmented reality, awesome stuff, bicycles, cardboard, cardboard bike, glasses, innovation, phones

To Honor Doug Engelbart, Who Passed Away Last Night, Please Go Watch His 1968 Demo

from the innovation-at-work dept

On the the 40th anniversary of Doug Engelbart's famous 1968 demo of a personal computer system, we urged everyone to find some time to watch the video of his demo. Now, with the news that Engelbart passed away last night in his sleep, at age 88, we'll once again suggest you find the 100 minutes necessary to rewatch the demo. This is the birth of modern personal computing on so many levels. Engelbart, and his staff at SRI, more or less invented the very concept of a personal computer, including the mouse, the graphical user interface, hyperlinks, and so much more that is now standard today. So many of those concepts are now ubiquitous, in part, because of Engelbart's brilliance, and his openness in sharing what he was working on and inspiring so many of those who came into contact with him over the years. Engelbart shared these concepts with the world, and the world took them and built so many useful things with them. The computing world we live in today would likely be very, very different if there had never been a Doug Engelbart.

Filed Under: computers, doug engelbart, gui, hyperlinks, innovation, mouse

Awesome Stuff: Ambitious Projects

from the not-your-next-nicknack dept

For our latest awesome stuff post, I thought perhaps we'd look at a few more "ambitious" projects. Many crowdfunding projects are really effectively "presales" of something that people might want: a gadget, an album, a book, a movie, an accessory, etc. However, there are some projects that are more ambitious in some sense. They're much more along the lines of getting people to support and donate to a vision. As such, they may be long shots, and those who support them might not get very much back in exchange, but it's neat to see people chase various dreams.

• First up, we have + POOL, Tile by Tile, a crazy ambitious project to build a giant floating "pool" in the river off of Manhattan, which actually acts as a giant strainer for the river. In other words, you are in a pool, and the water is actually river water, but it's been cleaned and filtered. You have to see the photos to realize just how ambitious this project is. Here's one, but the project has many more. Or, you can watch the video, which is fairly impressive in its own right: This is not actually the first time these guys have used Kickstarter. They did another project a couple years ago to fund the filtration tests, but the latest project is to help fund the actual pool. And they have a relatively neat way of doing it, letting anyone "buy a tile" that will go in the pool, where you can put whatever you want on the tile. Most buyers will also get a "first dip" allowing them to swim in the pool before it opens to the public. They're looking for $250,000 (which seems like a fairly small amount considering everything going into this project), and they still have a pretty big way to go, and less than two weeks to do it.
• How about bringing together a group of experts -- one in artificial intelligece, one in robot designs (making them look human), one in consciousness, one in biomorphics -- to build a better, futuristic, human-like robot. I have no idea if any of these experts really are as impressive as they claim to be, or if they'd be able to actually build this "Robot Adam Z1" to the point that (as they claim) it's the equivalent of a 3 year old child, but it certainly is ambitious. Given the very speculative nature of the project -- and the fact that lots of people have tried to build "human-like" robots -- it seems like they're asking for quite a bit: $300,000. And you don't get that much if you donate. The robot will remember your name at the low end. Higher up you can get a poem or a piece of artwork from the robot, or even a Google Hangout with the robot, but that's at $500 which seems steep. Given all that, perhaps it's not that surprising that they're a long, long way from the $300,000 they're asking for so far. But, since it's an IndieGogo "Flexible Funding" campaign, they'll still get the money even if it doesn't reach the goal. Of course, that might mean they don't actually get enough to do everything they want, which might be holding back some folks from donating.
• Finally, we head back to a project for the open waters, where the makers of the world's largest amateur-built submarine, the UC3 Nautilus, are asking for help to get the sub back in the water. It's been taken out of the water for necessary maintenance, and they're looking for some funding to help. Just the fact that some folks built their own damn submarine is impressive already, and the video definitely makes it look pretty cool. They're looking for $50,000 and they have a very, very long way to go to get there. It may be tough to convince people to pay for a maintenance tuneup for the sub, though. I'm guessing that more people would be interested in funding an original sub, rather than fixing up an old one. Still, the whole project definitely fits into that ambitious category of this week's theme.

That's it for this week. Go out and do something ambitious yourself this weekend.

Filed Under: artificial intelligence, awesome stuff, pool, robots, submarine

Awesome Stuff: The Future Is Finally Coming To Home Automation

from the getting-there-slowly dept

By now, weren't we all supposed to have little personal assistants that manage our lives, and weren't our homes supposed to be "smart homes" with fancy sensors to better manage everything? We've been hearing these promises for years, and it seems like we're finally inching towards that goal. Over the past few years, a number of smart home devices and systems have come and gone on Kickstarter, IndieGoGo and other platforms, but it seems like a bunch of new ones have launched recently. Let's look at a few.

• First up, we've got Benki, self-described as "connected devices done right." It appears they're looking to build out a whole suite of home automation sensors/devices that work nicely together. They're certainly not the only player in this space on the market (not by a long shot), but their initial devices really do look nice, simple, easy to use and fairly compelling. An outlet that doubles as a baby monitor that automatically pings your mobile phone when it hears a noise? Yeah, you can do that with Benki's smart outlet, Socket, which has a built in light sensor, temperature sensor and microphone. Or how about a combined camera, light sensor and temperature sensor. And, of course, everything can by controlled by your phone. The Benki folks apparently decided to go big or go home, choosing a super ambitious target of $220,000. With less than two weeks left, they're only about a quarter of the way there, meaning it seems unlikely they'll hit their goal without a huge last minute surge. Interesting project, but the goal might have been a bit out of reach.
• If you want to go all hackery with your home automation/sensor work, you should check out wigwag. In some ways, it could be similar to Benki above, but rather than focus on building a few nice looking initial devices, it seems that wigwag focused its initial efforts on building out a platform that will let hacker-minded folks do almost anything. They're offering up a sensor block, and some simple programming tools to let you write rules for "intelligent environments." The vision here is fairly bold -- basically using a variety of sensors to just do the right thing in your house given the situation. It's easy to have sensors that, say, turn on a light when you enter the room, but what if it takes into account other factors: is it late at night? Maybe just slightly illuminate the room, rather than the full blast of lights. Honestly, a combination of something like wigwag and Benki might be cool, as they're similar, but appear focused on slightly different areas of development. The wigwag folks chose a much more modest $50,000 target, and they've got nearly two months left in the campaign and they've already almost hit that goal. So this one will definitely get funded.
• Sensors controlled by your phone are great, but voice control is the in thing these days, so we'll kick it off with Fiona, the virtual home assistant, which comes straight out of random science fiction story. The video is kind of hilarious, especially the "date" example, where the guy asks Fiona to turn on some jazz music and dim the lights. Honestly, I'm a bit skeptical that the product works anywhere near as good as the video shows, and it seems like it may be a lot to shell out when it's not clear how well it will really work. Also, they show two different versions of the device and it's not clear which one they're actually selling. This seems like it could be cool if it worked, but there are a lot of open questions. The company seems to be focused on natural language techniques, but we've seen lots of fanfare around those sorts of things turn out to be less than promised when they hit the market (*cough* Siri *cough*). Another fairly ambitious goal, seeking $100,000. They're around 15% with 35 days to go which probably puts it as a borderline project, probably likely to just make it over the finish line, but not much more.
• And, finally, we've got a somewhat similar project, called ivee. Frankly, after watching the Fiona video, the ivee product doesn't look nearly as nice. It appears to be slower, have less functionality, and the text-to-speech and voice recognition don't appear as nice. However, that said, the ivee looks a hell of a lot more like a real product that I'm more confident would ship. The company behind it has been selling voice-activated alarm clocks for years, so it has some experience in the space as well. It doesn't seem totally futuristic like Fiona, but feels more like a stepping stone to that future. The ivee blew past its goal of $40,000 in just a few days, and there are still about four weeks left, so this one will be way overfunded by the time the campaign closes.

Who knows how well any of these products really work just yet, but it's nice to see so many companies trying to tackle these sorts of offerings that were always somewhere off in the distant future when I was growing up. It means that sooner or later someone's going to get these kinds of things right.

Filed Under: awesome stuff, home automation, sensors, voice control

More Details Emerge As States' Attorneys General Seek To Hold Back Innovation On The Internet

from the this-is-a-bad-idea dept

We already wrote about how various states' attorneys general (AGs) are seeking to get Congress to give them an exception to Section 230 of the CDA, which would let them pin liability on internet companies for the actions of their users. Now, more details are coming out, as reported in TechHive. The effort is apparently being led by South Dakota's attorney general, Marty Jackley, with help from AGs Bob Ferguson of Washington and Chris Koster of Missouri. Ferguson being included is a bit of a surprise, since Washington state has some big internet companies, and it's bizarre that he'd push for a law that would create so much harm to the internet. In the article, Jackley is quoted as complaining about:

the unintended consequence of Section 230 in that "you've essentially given these guys immunity" when state criminal laws are broken.

Except, that's wrong. Section 230 does not grant them immunity if they broke state criminal laws. It gives them immunity if their users broke state criminal laws. And that's perfectly reasonable, because the AGs should be going after the actual criminals, not the company who made the tools they used. In fact, since many companies will cooperate with legitimate law enforcement requests, having a good relationship with these companies should help these AGs catch criminals. That is, rather than blame Craigslist for criminals using it, they should be working with them to use information on the site to catch criminals. But I guess actually catching a pimp is less exciting than falsely calling Craigslist a pimp-enabler and attacking them in the press.

Meanwhile, some other AGs are looking to completely reinterpret section 230 to their liking. We already noted just recently that Mississippi Attorney General Jim Hood is trying to blame Google because he could search and find counterfeit goods for sale (by others). In comments, at the NAAG meeting, Hood is now trying to argue that because of Google's "autocomplete," it shouldn't be subject to 230 safe harbors.

One avenue prosecutors may seek to explore is the statute’s vague definition of an intermediary versus a content provider, Reidenberg suggested. During discussion after the panel presentations, Mississippi Attorney General Jim Hood pressed that angle, asking the panelists what acts by a site operator might be sufficient to categorize it as a content provider, not simply an intermediary.

Hood zeroed in on autocomplete in particular, saying, “We know they manipulate the autocomplete feature.” He is concerned about search engines, particularly Google, where for example a user entering “prescription drugs online” is given “prescription drugs online without a prescription” as an autocomplete option.

Except that if Hood actually understood how autocomplete worked, he'd know that's ridiculous. Google is not creating that content. It's just showing you what terms others are searching for. That is, it's providing factual information. That information could actually be useful to Hood, if he wanted to actually do his job and go after those who are selling the counterfeit drugs, rather than stupidly attacking the platform that would be a big help in tracking down the criminals. But, apparently, stopping truly rogue pharmacies is less headline grabbing than going after Google, even if Google has nothing to do with the actual sale of the counterfeit drugs.

Filed Under: attorneys general, bob ferguson, chris koster, innovation, jim hood, marty jackley, secondary liability, section 230, states

The Next Time Someone Says Twitter Is Killing Deep Thinking With Short Quick Messages, Show Them This

from the history-repeating-itself dept

It seems like we keep hearing people insist that the internet, and things like Twitter and Google, are making us dumber because we're no longer really delving into anything with any depth, but rather just finding and spreading short snippets of text. There's never been any real support for that concept, but leave it to good old xkcd to put it all in perspective with a bunch of historical quotes that show people saying basically the identical things more than a century ago. TL;DR: People have pretty much always insisted that "back in the day, we spent much more time thinking/digesting/experiencing" and that "the kids these days just rush around." Maybe, just possibly, that's not actually true. Perhaps it's just that, as we all get older, time seems to move much faster, and the complaints are really people who are getting older (and, yes, this includes me) recognizing that we can't always keep up.

Filed Under: culture, innovation, pace, smarter, technology, writing

WIPO: Informal Economy Innovates In The Absence Of Intellectual Monopolies

from the well,-look-at-that dept

One of the problems with the debates around copyright and patents is that they too often assume that intellectual monopolies are necessary in order to promote innovation or even basic economic activity. But that overlooks all kinds of domains where that's not true. In the field of technology, free software and the other open movements based on sharing are familiar examples of this kind of thing. Less well known so are the so-called "informal economies" found in many parts of the world.

To its credit, WIPO has commissioned a report on this whole area, entitled "Conceptual study on innovation, intellectual property and the Informal economy" (pdf). Here's how it defines the informal economy (IE):

The most appropriate conceptualization of the IE is as a continuum from formal to informal, where different activities and actors occupy different points along this continuum. The transition from informal to formal status is gradual; single firms, households, and workers may carry out some activities informally and others formally at the same time.

Despite that vagueness, the informal economy is important for many countries:

Estimates suggest that over the past two decades, informal employment or employment in the IE made up more than half of non-agricultural employment in most middle- and low-income countries. Sub-Saharan Africa is the region with the largest estimates for the contribution of the informal sector to gross domestic product (GDP): the IE makes for nearly two-thirds of GDP including agriculture and half of non-agricultural gross value-added (GVA). It is followed by India, with around 50% of total GDP. Then come countries from the Middle East, North Africa and Latin America.

For Techdirt readers, the most interesting part of the report will probably the chapter that concerns the use of what it calls "Mechanisms to appropriate returns from innovation in the informal economy", including "formal appropriation" through intellectual monopolies -- or, rather, their absence:

On the one hand, it can be argued that the absence of formal appropriation and the work in clusters make up the strengths of the IE's innovation system. In this view, the innovation system in the IE largely rests on "collective learning experiences" based on low entry barriers and free flows of knowledge. The dynamics among similar enterprises in collective geospatial clusters determine rates of innovation, economic successes and the value of the cluster. Individual firms or economic units are not the key determinants of innovation and efficiency.

Appropriation efforts must also be considered in light of the social systems -- specifically family structures, community networks and commercial clusters -- within which the IE operates. Knowledge flows are characterized by trust, reputation, reliability, social and cultural signaling, and the willingness to pool resources and collaborate. This facilitates access to information, and critically reduces transaction costs.

Clearly, in this context, the notion of formal appropriation of ideas can be considered alien and inadequate in this IE context. As one study suggests, actors believe that formal IP based on exclusions and proprietary knowledge is not compatible with the knowledge diffusion and learning processes of the IE which are based on communities, clusters and the exchange of information.

Naturally, as a report commissioned by WIPO, the opposing viewpoint is also considered:

On the other hand, and in contradiction to the above view, it has been argued that the presence of perpetual copying and absence of appropriation mechanisms is seen as a barrier to scaling up innovative activity in the IE. Entrepreneurs are unable to develop their businesses beyond a certain stage as they lack exclusive rights to or control over their innovations. Therefore, they have fewer incentives to invest in machines or human capital (e.g., training new apprentices), and are unable to reach certain economies of scale.

Firms may also forgo the possibility to specialize in different styles and techniques, as copying is the norm. The absence of branding or certificates/labels, leading to anonymity of the sector's products in the eyes of consumers, is said to prevent producers of good quality products from being rewarded.

Due to this systematic effect, only small incremental improvements in processes and some incremental improvements or adaptation of products are likely to be achieved. Economic growth and productivity gains in the informal sector are hence below par. The IE might also have a negative influence on the formal sector. The reasoning behind this is that informal firms that fail to comply with various economic regulations or to meet their tax obligations are able to expand and take market share away from formal firms, even when they are less efficient overall. At worst, economists are concerned that informal firms may also undermine the incentives of formal sector firms to innovate, adopt new technologies, develop their IPRs or develop brands.

There seem to be a lot of assumptions in there -- for example, that those operating in the informal economy don't pay their taxes fully. That's conflating the black economy, where taxes are certainly dodged, with the informal economy, which is about how work is organized, not its compliance with the law. Similarly, the assertion that companies will give up innovating just because others don't try to patent everything they produce is contradicted by the experience of open source, which eschews patents, but has driven an accelerated pace of innovation in the world of proprietary software.

Despite these biases, the report is a valuable contribution to an area that has been largely overlooked until now. The more that WIPO and its world become cognizant of the very different nature of the informal economy, the better it will be for them -- and for future debates about patents and copyright.

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Filed Under: development, economics, informal economy, innovation, wipo