Lamoreaux Sokoloff (2005) - Decline Of The Independent Inventor

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• This page is referenced in BPP Field Exam Papers

Reference

• Lamoreaux, N. and K. Sokoloff (2005), "Decline of the Independent Inventor: A Schumpeterian Story", NBER working paper *11654. pdf

Abstract

Joseph Schumpeter argued in Capitalism, Socialism and Democracy that the rise of large firms’ investments in in-house R&D spelled the doom of the entrepreneurial innovator. We explore this idea by analyzing the career patterns of successive cohorts of highly productive inventors from the late nineteenth and early twentieth centuries. We find that over time highly productive inventors were increasingly likely to form long-term attachments with firms. In the Northeast, these attachments seem to have taken the form of employment positions within large firms, but in the Midwest inventors were more likely to become principals in firms bearing their names. Entrepreneurship, therefore, was by no means dead, but the increasing capital requirements - both financial and human - for effective invention and the need for inventors to establish a reputation before they could attract support made it more difficult for creative people to pursue careers as inventors. The relative numbers of highly productive inventors in the population correspondingly decreased, as did rates of patenting per capita.

Schumpeter's Arguments

Innovation is defined by Schumpeter as:

• Distinct from invention
• When entrepreneurs innovate, they take a new idea and make it work
• Thus innovation is synonomous with commercialization: embody the idea in a productive enterprise and generate profits.

Patents:

• Some valuable inventions are never patented, and some patents have no economic worth.
• Are the grants of exclusive property rights to a new technological idea
• This allows the idea to be leased or sold
  • Potentially this solves the allocational efficiency problem of Arrow

The following arguments are attributed to Schumpeter's Capital, Socialism and Democracy:

• Giant industrial units expropriate the owners of the SMEs
• Entrepreneurs lose thier function - and entrepreneurs are the heart of the capitalist system, so this leads to socialism
• Entrepreneurs were the primary political support for "private property and free contracting"
• Large firms routinize the process of innovation
• Incremental advances inside large firms are realized as a matter of course
• Large firms were more efficient - possibly due to economies of scale
• He predicts the demise of the (independent) entrepreneur.

The new economics of information suggests that information asymetries place "severe limits on the exchange of technological idea in the market":

• Firm need to assess the value of an idea before investment
• Inventors fear firms will steal their ideas and so are unwilling to provide information

Note: This is Arrow's Information Paradox.

Firms are better positioned to overcome this market failure:

• They have experience with production and the market of the new good, so are better placed to assess value
• Information can be transmitted within the firm better than across boundaries (c.f. Williamson's relational specific investment and fiat)

Data

The data includes:

1. Three random cross-sectional samples: Patents from the Annual Reports of the Commissioner of Patents 1870-71, 1890-91, 1910-11
2. Longitudinal data created by selected all inventors with names starting with "B" - All patents for these inventors 25 years before and after they appeared in one the above samples
3. Patents for "Great Inventors", as noted in the Dictionary of American Biography born from 1820-1885

Legislation

The U.S. patent system was created in concordance with the Commerce Clause of the Constitution. It featured:

• Lower fees (that the UK)
• Impersonal administration proceedures
• The requirement that the patentee be the "first and true" inventor anywhere in the world
  • Which allowed ideas to be evaluated even before patenting
• Patentees must be individual men or women, not firms
• Effective enforcement
• Requirements for detailed specifications (and prototypes where appropriate)
• A central storehouse open to all in Washington

The system was designed to stimulate innovation and promote the diffusion of technical knowledge. The patent office began to regularly publish lists of issued patents and many commercial providers (who were also patent agencies) published their own lists.

Originally, patents were issued automatically and courts resolved disputes. Legislation in 1836 required trained examiners, leading to an increase in the perceived value of patents and the number of patents issued (3x to 6x increase).

Stylized Facts

The following stylized facts are reported from the data:

• Patenting per capita increased from 1800-1900 and then declined
• In-house R&D was inversely correlated - it began to rise after 1900.
• In the 1840's most inventors used partial assignment of rights based on geography.
• By 1870, due to railroads and other infrastructure that facilitated national markets, full national rights were more common.
• By 1890, less than 5% of patent assignments would use partial, geographic rights.
• Between 1870 and 1890 the percentage of patents that were assigned before issue rose from 18% to 29%

Full National Rights

The dominant use of full national rights led inventors to one of two possibilies: Either commerical themselves, or sell to a single (large) firm. In both cases they needed access to either capital markets or to invention markets, and patent agents and lawyers typically filled this role. Patent agents were able to create a national network, though connections with other lawyers, etc. However, trading of patent rights was correlated with the places where inventors were most active. Firms, likewise had incentives to locate where invention was dense. This leads to a basic clustering argument for both firms and inventors (and patent agents).

Independent Inventors

By selling of the property rights of their inventions, inventors could specialize on invention. This also leads to allocative efficiency, from which the inventors can benefit.

From the early 1800's to 1890 the percentage of patents given to individuals who had 10 or more patents over their careers (i.e. serial and specialized inventors) rose from 29% to 36%. Specialized inventors were most likely to trade away their patents. It is possible to reject the hypothesis that these specialized inventors were employed by large firms - these individuals generally had no long term attachment, or were (in the 1900's) prinipals of their own firms. Thus, these inventors became entrepreneurs in the Schumpeter sense. This is loosely confirmed by findings that these individuals were more mobile than average, and that they locational decisions followed systematic patterns: they tended to move to the Mid Atlantic states where rates of innovation were highest and availability of capital was easiest (c.f Silicon Valley).

Difficulties facing Independent Inventors

By 1900 the barriers to entry to becoming an inventor appeared to be rising. Most obvious was that formal degrees in science and engineering became more important. 10% of patents went to science and engineering degree holders born between 1820 and 1845, whereas 60% went to science and engineering degree holders born between 1865 and 1885 (with another 20% to other degree holders).

In addition the degree of independence decreased after 1900. Inventors assigned their patents to on average few recipients - and this was driven by changes in Mid Atlantic region, where large-scale R&D houses were (at least may have been) developing. In fact 60% of patents produced by serial and specialized patenters went either to large firms or to firms started by the inventor by 1910. Furthermore, the evidence suggests that serial inventors had more success in finding assignees for their patents in the later years of their career, consistent with the idea that inventor must prove themselves in order mobilize capital. During the last stage of their careers, these inventors were able to assign 70% of their patents, with 33% going to their own firms, but in the early stages of their careers, the assigned just 54% of patents, with 1% going to their own firms. That said, on average it appears that access to capital did get easier, and the rise is mostly accounted for by assignment to large firms. Possibly large firms were employing university graduates. Regardless, the proportion of assignments to large firms is consistent with their easy of access to capital markets.

Was Schumpeter Right?

By 1900 the advance of technology had transformed invention - the cost of R&D had risen making it difficult for independent inventors. So would-be inventors appear to studied for degree in science and engineering, and then moved to the Mid Atlantic region to work for large firms, where they could get the funds and complementary inputs for their work. Of course, in doing so, they lost their independence, which may have affected their creativity (as Schumpeter feared it would).

However, Cleveland, for example, shows evidence of being an early Silicon Valley - in Cleveland inventors were more likely to found their own firms. And, much more recent evident (post 1980's) suggests a return to this mode of invention.