Richard Florida
by Richard Florida
Sat Jul 18th 2009 at 10:00am UTC

Innovation and Economic Crises

This past week, I’ve look at the trends in U.S. innovation, commenting on Michael Mandel’s powerful and compelling thesis about the deceleration and interruption of American innovation. With the help of my MPI team, I’ve tracked patent data since 1980, examined patent trends for U.S. resident and foreign, non-resident inventors, and looked at the geographic distribution of patenting.

Overall, the trend in patenting is up – both in absolute numbers and controlling for population. Innovation has increased over the past decade, but not at the breakneck pace of the 1980s and 1990s. There have been two dips in patenting over the past decade – the first in the wake of the tech crisis of 2001 and the second, more recently, concurrent with the onset of the housing and financial bubbles and the subsequent economic crisis.

American innovation has shifted and become more geographically concentrated. Places like Silicon Valley and Seattle have seen a steady increase in innovation while older, industrial centers like Pittsburgh and Detroit have declined significantly. Innovation in large cities like New York and Chicago has stagnated. And American innovation has grown increasingly dependent on non-resident, foreign inventors.

Today, I focus on a broader historical question: How do economic crises affect American innovation? Does innovation slow down or speed up during periods of crisis?

Joseph Schumpeter long ago argued that crises were seedbeds of innovation and entrepreneurship. Innovations developed during crises generate the gales of creative destruction that launch new technologies, remake existing industries, and give birth to entirely new ones – setting in motion new rounds of economic growth. Economists Gerhard Mensch and Christopher Freeman have examined the historical timing of innovations, with Freeman famously arguing that the pace of innovation is actually relatively constant: Innovations bunch up during crises, only to be unleashed as economic conditions are restored.

The graph above is reproduced by economist Alfred Kleinknecht. It shows patent activity from 1750 to 1970. It tracks actual patents granted from 1901 to 2005. There are clear spikes in innovative activity during the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s.

The historical literature also suggests that crises are periods of significant innovation. Joel Mokyr and Naomi Lamoreaux have documented the rise of important innovations like the incandescent light, the steam turbine, and the transformer during the Long Depression. Economic historian Alexander Field finds the 1930s to be the “most technologically progressive” decade of the 20th century.

The chart below, compiled by the MPI’s Patrick Adler based upon a reading of the historical literature, identifies some of the major innovations of the Long Depression and the Great Depression. If the past is any guide, we should expect some acceleration of innovation – and particularly of the dramatic innovation Mandel wants to see – in the coming decade.

The graph below, compiled by my colleague Charlotta Mellander, updates the story, charting patents granted per 10,000 people from the 1890s to 2007. The rate of innovation rose significantly after the Long Depression. It then dipped during the Great Depression before trailing off considerably during the World War II period. American innovation rebounded remarkably in the post-war period before trailing off in the 1970s. Since the early 1980s, however, American innovation has surged to record highs. There have been two dips in innovation in the 2000s. But as of 2006 or 2007, innovation has fallen only slightly from its record pace.

So what’s happened to U.S. innovation? Like virtually every other facet of the economy, it has been – and continues to be – reshaped by globalization. As we saw on Thursday, foreign non-resident inventors have become a key element growing U.S. patenting and a big piece of the American innovation system. Beginning around 1980, non-resident inventors essentially closed the gap with U.S. inventors. By the late 1990s, they had pulled even and were at times outpacing U.S. inventors. This is part and parcel of the globalization of the economy and the fact that the U.S. is the biggest market and most innovative nation on the planet.

This has altered the American system of innovation in a deep and fundamental way – changing it from a system that for the better part of a century was based on producing and commercializing innovations to one that is more attuned to attracting inventors and innovation globally. This shift is also reflected in the changing geography and regional concentration of U.S. innovation – the decline of old, integrated, regional innovations systems in locations like Pittsburgh and Detroit and the rise of new, globally focused clusters like Silicon Valley.

Innovation is no longer an American game – or, for that matter, a game of any one nation. The countries of the world are now all part of a much more global innovation system. Strategically, this shift means from organizing to generate new breakthrough innovations to organizing to absorb innovations coming from many different sources worldwide.

The U.S. is uniquely positioned because of its size, scale, universities, and venture capital system; its sophisticated end-users and customers; and its ability to attract global talent – to harness and reap the benefits of this global system. Its major innovation clusters reinforce this advantage and they will be hard to displace. That said, for the first time, the overall rate of American innovation has come to depend on foreign inventors. Anything that might slow the immigration or inflow of foreign inventors – or redirect their inventions and patents – would undoubtedly damage the rate of American innovation.

The key question for the future is less about the slowdown in innovation and more about which people and places will prosper in this new age of accelerating global innovation.

8 Responses to “Innovation and Economic Crises”

  1. Creative Class: Innovation and Economic Crises | Lies My Gantt Chart Told Me Says:

    [...] and Economic Crises Saturday, July 18, 2009 By jarie Nice summary of the weeks data about Innovation and how it affects the economy. The dips in innovation in 2000 and 2006 are most likely due to [...]

  2. AchieveAlign — blue ocean = being innovation Says:

    [...] richard florida and his work at creative class before.  i’m a big fan.  his latest post Innovation and Economic Crises attempts to make the point that crises are periods of significant innovation … and does so [...]

  3. Dan Dascalescu Says:

    The number of patents are not a reliable indicator of innovation. See Basalla, George. 1988. The Evolution of Technology. New York: Cambridge, p.128, cited by Shermer, Michael in The Mind of the Market, p. 57:

    “Seventy of the most important inventions of the first half of the 20th century were the result of independent inventors who did not patent their inventions: the automatic transmission, Bakelite, the ballpoint pen, cellophane, the cyclotron, the gyrocompass, insulin, the jet engine, Kodachrome film, magnetic recording, power steering, the safety razor, xerography, the Wankel rotary-piston engine, and the zipper.”

  4. zoltan acs Says:

    This is a brilliant post. I have two questions. First, the the increased activity between patents and depressions a cause or an effect. These two interact with each other. WE cannot figure this one out easily. But the second issue of the decline of the US patenting during this great recession can be explored with international data. I suspect that in fact if we looked at patenting around the globe it just might be up. So Mandel raised an interesting question but I suspect he is looking in the wrong place.

  5. zoltan acs Says:

    A final note about causation. If you look carefully the patenting happened before the depression, so it is a leading indicator. This also happened in the US. in the 1970s after the invention of the microprocessor. Once a major new invention, or cluster of inventions come out, investment in the old industries stops almost on a dime. What happens is a recession, great recession or a depression, until investment catches up in the new industries. How long that takes depends on many things. Given this story, I do not think we have had a great many new patents lately unless they are all hidden overseas. And that I doubt.

  6. Christi Pemberton Says:

    The invention of the internet spawned a whole new system of economy, job creation, global communication; which has accelerated this major economic shift..meaning…the recession may cause for there to be new inventions, but the shift and restructuring of this economy already started. It just took the recession to kind of present this reality in a more stark and obvious fashion, and forced us to realize that this change was happening.

  7. fitness equipment stores Says:

    Change is inevitable and innovation is necessary. I think it is only a matter of learning to adjust and cope up with the trend even during recession.

  8. tattoo removal Says:

    It’s very interesting to see how the recession can affect the people’s tendency to create new ways to profit. I’m not sure that looking at patents is the best way to check it because surely there are a lot of “inventions” that doesn’t need to be registered or patented.