Lecture 8 Patent Systems and Technological Change

1. Lecture 8 Patent Systems and Technological Change Se Yan

2. Did the Scientific Revolution of the 17th CenturyCreate the Industrial Revolution of the 18th?

3. In 1605, Francis Bacon first proposed that scientific advance could improve technology andraise the standard of living:

4. This theory can be applied to history by specifying the boxes like this:

5. A key question is the link between science and technology. There are three possibilities: • New knowledge was discovered and applied. • The scientific method was applied to technology with great effect. • Popularizing science increased interest and involvement in it, and that led to technological improvement.

6. Did new scientific knowledge lead to new technology in the 18th century? The ‘atmospheric’ steam engine is the sole example. In 1672 von Guericke found that if air was pumped out of cylinder A, the weights D rose as the weight of the atmosphere pushed down the piston in cylinder A. In 1675 Papin found that filling the cylinder with steam and then condensing it accomplished the same purpose.

7. In 1712 Newcomen invented an ‘atmospheric’steam engine that pumped water from a mine. Steam from the boiler filled the cylinder. When water was injected into the cylinder, the steam condensed, and depressed the piston raising the pump.

8. Invention of Coke Smelting • No scientific knowledge needed—people had been trying to substitute coal for charcoal in making iron for years, but wasn’t economical • Not suitable for smelting main product: wrought iron • Abraham Darby’s contribution • Developed an iron product for which suitable: cast iron pots • Accidentally discovered that use of steam engine to create a more regular blast furnace—cut amount of coal needed to make iron

9. Invention of Cotton Spinning • Not result of scientific discovery or dramatic departure • James Hargreaves’ spinning jenny resembles spinning wheel • Richard Arkwright’s waterframe built on previous inventions • Motive was import substitution

10. There was no connection between the knowledge discovered in the scientific revolution and the inventions of the industrial revolution.The link from new scientific knowledge to new technology becomes important only after 1850.

11. What about the other links? The ScientificRevolution may have influenced production as the scientific method was applied to technology and interest in science spread.The Scientific method includes the ideas:• that there are natural laws.• that these laws are mathematical.• that they can be discovered by studying facts.• that they can be used to improving the world.

12. A ‘culture of science’ did develop. It was part of broader intellectual movements and involved people besides scientists. • Empiricism is the philosophy that “from Experience…all our Knowledge is founded.” (John Locke) • Facts--rather than the Bible or classical authors--were the source of knowledge. • Empiricism was stimulated by the discovery of the Americas by European explorers. • Galileo’s observations of astronomical bodies contradicted classical authors by showing that ‘heavenly’ bodies were not ideal substances but had imperfections like our world. • Galileo and Newton showed that simple, mathematical laws explained the facts of the world.

13. According to Bob Allen, “technology was invented by people in order to make money.” • “Inventions were investments where future profits had to offset current costs.” • “The balance between the profits and the costs of an invention depended on the size of its market.”

14. Jacob Schmookler • Jacob Schmookler was the first economist successfully to explore statistically the economics of technological innovation at a detailed industry level. • He crystallized the notion of endogenous technological change and its influence on economic growth two decades before the concept was reinvented by macro economists.

15. Jacob Schmookler’s theory of invention: • Defined an invention “as a prescription for a producible product or operable process so new as not to have been ‘obvious to once skilled in the art’ at the time the idea was put forward.” • Posited that there were two possible determinants of invention: • the wants that inventions satisfy (demand side) • the intellectual ingredients of which inventions are made (supply side) • Actually tried to test directly by looking at accounts of important inventions and seeing whether the inventors were stimulated by scientific discoveries or were responding to economic needs.

16. Jacob Schmookler’s Demand-Side Test • If invention is an economic activity which, like other economic activities, is pursued for gain, then the expected gain from an invention depends on the expected sales of the goods embodying the invention. • An exogenous increase in demand should lead to an expected increase in sales of goods embodying inventions and so should lead to an increase in inventions. • Further, because expected sales are generally proxied by trends in present sales, increases in output should lead to increases in invention (invention should be procyclical).

17. The US Patent System and Inventive Activities(Sokoloff, Lamoreaux & Khan) First modern patent system was the American one, not the British! • Democratic (low cost of access, the British was very expensive) • Full disclosure (patentee must provide detailed specifications, Examination system introduced in 1836) 1) Powerful stimulus to inventive activities (by 1810s patenting per capita is higher in USA thank in UK) 2) Creation of well-functioning "Market for Technologies“ (based on specialized intermediaries and journals). Seemingly, technological knowledge was not difficult to trade! 3) "Almost optimal" division of innovative labor

18. Patents and the Industrial Revolution • "..Innovation will be encouraged by modifying the institutional environment, so that the private rate of return approaches the social rate of return...The development of patent laws provides such protection....By 1700...England had begun to protect private property in knowledge with its patent law. The stage was now set for the industrial revolution." [D. North and R. Thomas (1973), The Rise of the Western World] • "A number of writers have laid stress on the incentive effect of patent legislation. I am inclined to doubt its significance...“ [David S. Landes (1969), The Unbound Prometheus]

19. Patents and Inventive Activities H. Dutton (1984) and R. Sullivan (1989,1990) • Early British patent system was cumbersome and very imperfect (by modern standards) • Notwithstanding this, it DID stimulate inventors to inventEmergence of an "infant invention industry" and “quasiprofessional“ inventors • On balance, not very far from ideal (invention+diffusion) ! MacLeod (1988) is much more cautious ! • Heterodox uses of the patent system (recognition, advertisement, etc.) • Significance of inventive activity carried out outside the system

20. Patents and Inventive Activities Patents Inventions

21. The US Patent System and Inventive Activities(Sokoloff, Lamoreaux & Khan) First modern patent system was the American one, not the British! • Democratic (low cost of access, the British was very expensive) • Full disclosure (patentee must provide detailed specifications, Examination system introduced in 1836) 1) Powerful stimulus to inventive activities (by 1810s patenting per capita is higher in USA thank in UK) 2) Creation of well-functioning "Market for Technologies“ (based on specialized intermediaries and journals). Seemingly, technological knowledge was not difficult to trade! 3) "Almost optimal" division of innovative labor

22. Sokoloff: Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846 • The first paper to use US patent records to test Schmookler’s claims • 4500, 30% randomly drawn sample of patent records from the US in 1790-1846 • Main findings • Striking procyclicality • Inventive activities quite responsive to market demand during the era • Strong relationship between patenting and proximity to navigable inland waterways • Inventive activities were positively related to the growth in markets

23. Changes in Patent Laws • At beginning, applications for patents were scrutinized carefully for novelty and usefulness • Later changed to a system of patent registration, with a non-trivial fee of $35 • Fundamental change in 1836: a staff of technical experts was established to review applications systematically for novelty and usefulness. Rejection rate rose to 20 to 50 percent. • Short run: sharp decline in the number of patents filed; Long run: surge again in the mid-1840s

24. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 820.

25. Mechanisms of Procyclicality • Rise of expected return • Reverse causality: inventive activities drove business cycles • Strength is questionable • Embargo example disqualifies • Growing economy generated more resources for inventive activity • Need too high income elasticity of invention

26. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 824.

27. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 825.

28. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 826.

29. Regional Pattern of Inventive Activity • Abruptly clustered in Southern New England and New York • Could not be a result of a breakthrough of knowledge • Changes in market demand stimulated inventive activities • Big cities; but not all the story: high patent rates in both urban and rural areas • Low cost of transportation, proximity to a navigable waterway • Certainly there are exceptions

30. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 834.

31. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 832.

32. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 833.

33. Source: Kenneth L. Sokoloff, “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846,” Journal of Economic History, 48 (Dec. 1988): 838.

34. Joel Mokyr disagrees • Analysis didn’t satisfy some scholars committed to alternative (supply-side) views—e.g. Joel Mokyr • Just picking up the small stuff—what he calls “micro inventions”—these generally result from an intentional search for improvements, and are understandable—if not predictable—by economic forces. . . . They are guided, at least to some extent, . . . by signals emitted by the price mechanism” (p. 295) • Important ones—macro inventions (general purpose technologies)—arise in very different ways—“seem to be governed as much by individual genius and luck as by economic forces” (p. 295)—more likely to be stimulated by scientific discoveries than by economic opportunity

35. Khan & Sokoloff and the "Great Inventor" Approach • Two Samples: 160 "Great" inventors active in the period 1790-1865 and 409 for the period 1790-1930 • "Great" = mentioned in authoritative biographical dictionaries (eg, Dictionary of American Biography) • 150 inventors in the first sample were patentees (in total they received 1,178 patents) • Mainly "insiders" to the industry of their major invention (knowledge of specific market needs or technological shortcomings) • They systematically and persistently used the patent system to appropriate the economic returns of their inventions, also through the market for technologies. • Still procyclical and responsive to market sizes

36. Source: B. Zorina Khan and Kenneth Sokoloff, “‘Schemes of Practical Utility’: Entrepreneurship and Innovation Among ‘Great Inventors’ in the United States, 1790-1865,” Journal of Economic History, 53 (June 1993): 292.

37. Source: B. Zorina Khan and Kenneth Sokoloff, “‘Schemes of Practical Utility’: Entrepreneurship and Innovation Among ‘Great Inventors’ in the United States, 1790-1865,” Journal of Economic History, 53 (June 1993): 291.

38. Source: B. Zorina Khan and Kenneth Sokoloff, “‘Schemes of Practical Utility’: Entrepreneurship and Innovation Among ‘Great Inventors’ in the United States, 1790-1865,” Journal of Economic History, 53 (June 1993): 293.

39. Why, in theory, might a patent system be a good thing? • Technological innovation is expensive and risky. Inventors won’t undertake if others can free ride on their investments. • Can encourage inventors to undertake by offering temporary monopoly on inventions. • BUT there is a problem: Inventions do not occur in isolation. Awarding a patent to one inventor can retard or stifle related discoveries that other inventors might make.

40. Why patents? Why not another type of reward, like prizes? • For prizes, have to know in advance what you want someone to discover. • For prizes, have to figure out in advance the value of a discovery. • According to Khan and Sokoloff, the awarding of prizes is subject to the social prejudices of, and rent-seeking behavior by, elites.

41. British High fees Many steps Courts suspicious Features of the Patent System

42. U.S. Constitution, Article I, Section 8: The Congress shall have Power … To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries …

43. British High fees Many steps Courts suspicious U.S. Low fees One-step process Courts supportive Features of the Patent System

44. British High fees Many steps Courts suspicious Non-inventors could secure patents U.S. Low fees One-step process Courts supportive Only the first and true inventor could patent Features of the Patent System

45. British High fees Many steps Courts suspicious Non-inventors could secure patents Technical information was difficult to access U.S. Low fees One-step process Courts supportive Only the first and true inventor could patent Technical information was easy to access Features of the Patent System

48. British High fees Many steps Courts suspicious Non-inventors could secure patents Technical information was difficult to access Registration system U.S. Low fees One-step process Courts supportive Only the first and true inventor could patent Technical information was easy to access Examination system Features of the Patent System

49. U.S. Patent Office Building

50. If differences between the British and U.S. patent systems mattered: • Patenting per capita should have been higher in the U.S. than in Britain. • Elites should have been responsible for a higher proportion of patenting in Britain than in the U.S. • Relatively fewer patents should have been sold (assigned) in Britain relative to U.S.