Crisis Innovation

Tania Babina, Asaf Bernstein, and Filippo Mezzanotti

Depressions and recessions can leave lasting scars on employment, salaries, and the economy. But what about their effect on innovation? How do inventors weather the financial storm? New research shows that the Great Depression had a variety of impacts on innovation, in both the short and longer term. While the Depression was in many respects unique, its impact on innovation may nevertheless offer clues to how financial shocks can change inventors’ behavior.  

In the early 20th century, independent inventors — those not associated with a firm — largely drove innovation in the U.S. Not only did these inventors receive a majority of the patents, but their patents were of higher quality than patents at firms and were a substantial source of new technologies. The Great Depression brought some changes to this regime, both bad and good.

First, the Depression led to an immediate drop in the number of patents from individual inventors, especially in those counties hardest hit by the Depression (for instance, counties with a bank that failed). Those counties experienced a 13% decline in patenting compared to counties in the same state without a bank failure and the data suggest that the Depression caused that drop. That decline seems to have persisted, as those counties have continued to lag behind in patenting by independent inventors ever since. 

Second, the number of patents issued to independent inventors dropped compared to those issued to firms. Independents’ patents fell by 50% overall, from 70% of all patents, ceding the top patenting spot to firms. Independent inventors have remained behind firms ever since. While there could be several factors influencing these secular trends, the analyses proposed by the authors suggest that the unfolding of the Great Depression was a crucial factor in explaining this radical change in the way innovation was organized in the U.S.  

However, although the overall number of patents declined, their quality did not. Indeed, the quality of patents produced by independent inventors actually increased throughout the Depression. Given the nearly 80 years since the Depression ended, one can get a sense of how important a technology turned out to be based on the number of times it is cited by a later patent. Patents issued to independent inventors during the Depression have had a strong record of future citation, showing their long-term importance. This finding is consistent with previous research that has shown that valuable entrepreneurial ideas can get funded even during recessions. 

The data also show that a considerable number of independent inventors, and in particular those in hard-hit counties, sought refuge from the Depression in firms, which continued to innovate and file patents as before. This shift may explain why firms in those counties saw an increase in overall patenting as well as in the quality of their patents. It also appears, however, that inventors did not leave those harder-hit areas in any significant numbers, which could have led to a “brain drain” but did not.

There are parallels between those independent inventors in the early 20th century and contemporary technology entrepreneurs, which makes this research timely and relevant. Both rely heavily on external investors for early funding, and both are focused on developing new technologies or products with an eye to either selling their innovations to an established company or commercializing the product themselves. Both are also important engines for the development of new ideas and technologies in general. This analysis of the effects of the Great Depression on early 20th-century inventors may provide some insights on how today’s technology entrepreneurs will fare in the face of a similar shock.

A final important result of these findings is that large economic shocks can facilitate the reallocation of resources across different organizational forms of innovation. Specifically, the distress from the Depression appears to have affected the way innovation moved from independent inventors to firms. Understanding these shifts can generate important insights into the determinants of business dynamism.  

NBER working paper