In my post "The Invisibility of Freedom," I quoted Friedrich Hayek thus:
"Since the value of freedom rests on the opportunities it provides for
unforeseen and unpredictable actions, we will rarely know what we lose
through a particular restriction of freedom. Any such restriction, any
coercion other than the enforcement of general rules, will aim at the
achievement of some foreseeable particular result, but what is
prevented by it will usually not be known. The direct effects of any
interference with the market order will be near and clearly visible in
most cases, while the more indirect and remote effects will mostly be
unknown and will therefore be disregarded. We shall never be aware of
all the costs of achieving particular results by interference."
Now consider, in this light ...
The Patent Controversy
Today one of the most controversial issues in economic policy is
that of patent law. Is a patent just an extension of property rights to
the realm of ideas? Or is it an unwarranted interference by the
government into the rights of individuals who have purchased goods and
services to use them as they see fit? Should the Western system of
patents be extended worldwide? Or should we get rid of patents
entirely? Is the patent system responsible for modern miracle drugs? Or
is it to blame for the millions dying of HIV in Africa? Do patents lead
to greater innovation and economic growth? Or do they kill the goose
that lays the golden egg?
The issue of whether patents are genuine property rights or
unwarranted government interference cannot of course easily be answered
by a natural experiment. We will leave that discussion to philosophers.
The impact of patents on innovation does have an objective answer. In
this case history instead of nature has been kind enough to provide us
with a wonderful natural experiment. This experiment took place in the
county of Cornwall, England, between 1772 and 1852. It was there, in
the extreme southwest of England, in the wet depths of the Cornish
copper and tin mines, far removed from the supply of coal in Wales,
that the steam engine was pioneered.
To examine innovation in steam technology, we need a measure of how
good a steam engine is. One important measure is the amount of work
delivered by a given amount of fuel. This can be measured by the duty
of a steam engine: the number of pounds of water that can be lifted one
foot for each 94 pounds of coal consumed.
In 1772 steam engines were of the so-called Newcomen design of which
the best had a duty of 10 million foot-pounds (10M). In 1777 Matthew
Boulton and James Watt began selling the first steam engines with a
separate condenser. These initially had a duty of 18M, rising by 1792
to a peak of 26M. There things rested until 1814 when the use of the
high-pressure design of Richard Trevithick led to engines with a duty
of 55M. The duty then rose relatively continuously until it reached a
peak of 110M in 1852.
To summarize: During the 42 years from 1772 to 1813 duty rose 3.8
percent per year; during the 38 years from 1814 to 1852 duty rose more
than twice as fast—8.5 percent per year. The evolution of the duty is
charted in the figure. The state of innovation is best represented by
the best engine currently being produced, but for completeness the
average and minimum duty of constructed engines is reported. The
decline in duty growth after 1852 reflects both the general decline of
the Cornish mining industry and the more difficult conditions in which
steam engines were forced to operate due to the deepening of the mines.
As it happens there is one critical difference between the earlier
period and the later period. By patenting the separate condenser
Boulton and Watt, from 1769 to 1800, had almost absolute control on the
development of the steam engine. They were able to use the power of
their patent and the legal system to frustrate the efforts of engineers
such as Jonathan Hornblower to further improve the fuel efficiency of
the steam engine. By way of contrast, and fortunately, Trevithick did
not patent his equally innovative high-pressure design.
Ironically, not only did Watt use the patent system as a legal
cudgel with which to smash competition, but his own efforts at
developing a superior steam engine were hindered by the very same
patent system he used to keep competitors at bay. An important
limitation of the original Newcomen engine was its inability to deliver
a steady rotary motion. The most convenient solution, involving the
combined use of the crank and a flywheel, relied on a method patented
by James Pickard, which prevented Watt from using it. Watt also made
various attempts at efficiently transforming reciprocating into rotary
motion, reaching, apparently, the same solution as Pickard. But the
existence of a patent forced him to contrive an alternative
less-efficient mechanical device, the sun and planet gear. It was only
in 1794, after the expiration of Pickard’s patent, that Boulton and
Watt adopted the economically and technically superior crank. The
impact of the expiration of Watt’s patents on his empire may come as a
surprise as well. Far from being driven out of business, Boulton and
Watt for many years were able to charge a premium over the price of
other steam engine manufacturers.
Here we see clearly the upside and the downside of the patent system
in action. The upside is that it may be the case that the prospect of a
31-year monopoly induced Watt to spend three and a half years of his
life—between late 1764, when he first was asked to repair a steam
engine, and mid-1768, when he applied for patents on his improved
design—working to improve steam technology.
The downsides are two. The first is that the reward to success bears
no relation to the cost of invention. In what respect is it necessary,
reasonable, or fair to grant a 31-year monopoly and make a man
fabulously wealthy because he spent a few years working on a project
that benefited his fellow man? Certainly this kind of inducement was
not needed for Trevithick, whose contribution to steam technology
raised the duty 110 percent as against Watt’s contribution, which
raised the duty only 80 percent.
The second downside of the patent system is the devastating effect
it has on incremental innovation. From 1786 to 1800 there was no
increase in the duty of steam engines at all, as Boulton and Watt
successfully sought to prevent competition by suppressing innovation.
This should be a cautionary note for people who think that the current
wave of patent litigation triggered by a system of software patents
created by the courts is likely to have a beneficial impact on software
innovation.
Collaborative Innovation
For the 11 years following the end of the Boulton and Watt monopoly,
Cornish mining activities underwent a period of slackness, as the mine
adventurers were content with the financial relief coming from the
cessation of the premiums they had paid to Bolton and Watt. As a
consequence they neglected the maintenance and the improvement of their
engines. This situation lasted until 1811, when a group of mine
captains decided to begin the publication of a monthly journal
reporting the relevant technical characteristics, the operating
procedures, and the performance of each engine. Their explicit
intention was twofold. First, the publication of the reports permitted
the rapid individuation and diffusion of best-practice techniques.
Second, it introduced a climate of competition among the engineers
entrusted with the different pumping engines, with favorable effects on
the rate of technical progress. Joel Lean, a highly respected mine
captain, was appointed as the first engine reporter. The journal would
later be called Lean’s Engine Reporter. During the 31 years after 1811
this collaborative competitive effort at innovation raised duty by more
than the great “breakthrough” of Watt ever did.
It is worth remarking another important feature of the process of
technical change in Cornish engines during the collaborative period.
Most engines were single-cylinder, high-pressure, single-acting
engines, with a plunger pump of the type originally erected by
Trevithick in 1812. Interestingly enough, however, alternative designs
were never completely ruled out. For example, in different periods,
engineers such as Arthur Woolf and James Sims continued to experiment
with compound engines. Throughout this period, the development of the
Cornish engine remained a fluid state and this facilitated a more
thorough exploration of alternative designs.
The astute reader will no doubt notice that the collaborative
innovation occurring after the expiration of the Watt patents resembles
nothing so much as modern open-source software development. Like with
open-source software, altruism and socialism played no role—just good
old-fashioned capitalist incentives. Engineers were recruited by
captains of the mine on a one-off basis to build and design an engine.
Engineers were in charge of the design and they supervised the erection
of the engine that was commissioned to them. They also provided
directions for day-to-day working and maintenance of the engines they
were entrusted with. Thus the publication of technical information
concerning the design and performance of different steam engines
permitted the best engineers to consolidate their reputation and
improve their career prospects. Over time, this practice gave rise to a
professional ethos favoring sharing and publication of previous
experiences.
Much of the free/open-source-software industry operates this way
today, with software engineers competing for future business through
the quality of their current innovations. Sharing of information is a
key part of this competition. If Linus Torvalds, creator of the Linux
kernel, is not nearly so rich as Bill Gates, he is nevertheless richer
than most of us. (See Michele Boldrin and David K. Levine, “Open-Source Software: Who Needs Intellectual Property?” The Freeman, January 2007.)
Even the modern controversy over the current effort of the Free
Software Foundation to limit software patents through the General
Public License Version 3 finds reflection in the earlier Cornwall
experience. Familiar with the negative impact of the Watt patents on
innovation, Cornwall mine engineers were reluctant to patent their
inventions. From 1781 to 1852 Cornish residents took out a grand total
of 15 patents on steam technology—against 994 patents on steam
technology in all of England during that period. Will it surprise you
to learn that the area with the fewest patents also was the area that
contributed the most to the innovation and development of steam
technology?
One may wonder why development in an obscure corner of England
should draw our attention. As it happens, the design of fuel-efficient
high-pressure steam engines did not only serve to improve the
efficiency of pumping water out of mines in one small region. It is the
fact that efficient high-pressure engines can be made light and compact
and do not require much weight of fuel that made possible such modest
advances as . . . the steam train, the steam boat, the steam jenny, and
the steam just-about-everything-else. In short—the steam engine that we
imagine as the centerpiece of the Industrial Revolution, the key link
that took us from riding horses to being frequent fliers—was not the
product of the inventive genius of James Watt. When the Boulton and
Watt monopoly expired in 1800 steam engines were used only to pump
water out of mines. The earth-shattering innovation of widely usable
steam engines was the product of the efforts of Joel Lean and dozens of
other equally anonymous Cornwall mining captains and engineers. It is
equally a tribute to their steady innovation without making use of
patents.
The source.
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