The most fundamental fact in the economic history of the world is that, from the dawn on mankind until the middle of the 19th century in a small corner of Europe, the material living standards of the average human varied within a very small range: perhaps the wealthiest places, ever, were five times richer than regions on the edge of subsistence. The end of this Malthusian world is generally credited to changes following the Industrial Revolution. The Industrial Revolution is sometimes credited to changes in the nature of invention in England and Holland in the 1700s. If you believe those claims, then understanding what spurred invention from that point to the present is of singular importance.
A traditional story, going back to North and others, is that property rights were very important here. England had patents. England had well-enforced contracts for labor and capital. But, at least as far as patents are concerned, recent evidence suggests they couldn’t have been too critical. Moser showed that only 10% or so of important inventions in the mid-1800s were ever patented in the UK. Bob Allen, who we’ve met before on this site, has inspired a large literature on collective invention, or periods of open-source style sharing of information among industry leaders during critical phases of tinkering with new techniques.
Why would you share, though? Doesn’t this simply dissipate your rents? If you publicize knowledge of a productive process for which you are earning some rent, imitators can just come in and replicate that technology, competing away your profit. And yet, and yet, this doesn’t appear to happen in many historical circumstances. Bessen (he of Bessen and Maskin 2009, one of my favorite recent theoretical papers on innovation) and Nuvolari examine three nineteenth century industries, American steel, Cornish steam engines and New England power weavers. They show that periods of open sharing on invention, free transfer of technology to rivals, industry newsletters detailing new techniques, etc. can predominate for periods a decade and longer. In all three cases, patents are unimportant in this initial stage, though (at least outside of Cornwall) quite frequently used later in the development of the industry. Further, many of the important cost reducing microinventions in these industries came precisely during the period of collective invention.
The paper has no model, but very simply, here is what is going on. Consider a fast growing industry where some factors important for entry are in fixed supply; for example, the engineer Alexander Holley personally helped design eight of the first nine American mills using Bessemer’s technology. Assume all inventions are cost reducing. Holding sales price and demand constant, cost reductions increase industry profit. Sharing your invention ensures that you will not be frozen out of sharing by others. Trying to rely only on your own inventions to gain a cost advantage is not as useful as in standard Bertrand, since the fixed factors for entry in a new industry mean you can’t expand fast enough to meet market demand even if you had the cost advantage. There is little worry about free riding since the inventions are natural by-products of day-to-day problem solving rather than the result of concentrated effort: early product improvement is often an engineering problem, not a scientific one. Why would I assume sales price is roughly constant? Imagine an industry where the new technology is replacing something already being produced by a competitive industry (link steel rail ties replaced iron ties). The early Bessemer-produced ties in America were exactly this story, initially being a tiny fraction of the rail tie market, so the market price for ties was being determined by the older vintage of technology.
Open source invention is nothing unusual, nor is it something new. It has long coexisted with the type of invention for which patents may (only may!) be more suitable vectors for development. Policies that gunk up these periods of collective invention can be really damaging. I will discuss some new research in coming weeks about a common policy that appears to provide exactly this sort of gunk: the strict enforcement of non-compete agreements in certain states.