“Patent Alchemy: The Market for Technology in U.S. History,” N. Lamoreaux, K. Sokoloff & D. Sutthiphisall (2012)

It may appear that the world of innovation looks very different today than it used to. Large in-house R&D outfits – the Bell Labs of the past – are being replaced by small firms who sell the results of their research on to producers. Venture capital funding of research appears more and more important, both for providing capital to inventors and to linking the inventors up with potential buyers. Patent trolls hound the innocent, suing them for patent violations they weren’t even aware of. The speed with which patents are evaluated has slowed to a crawl, and the number of patents being granted continues to grow. Many patents are merely defensive, acquired solely to keep someone else from acquiring them.

Lamoreaux et al, building on earlier work by Lamoreaux and Sokoloff as well as Tom Nicholas’ interesting recent research, point out that none of the above is strange. The rise of in-house R&D is a phenomenon that doesn’t show up in great number in America until well into the twentieth century, only becoming dominant after the Second World War. Around the turn of the century, most innovation was done by small, independent inventors, or by small research firms like Edison’s outfit. A series of intermediaries, principally but not always patent lawyers, served both to file the proper paperwork and to link inventors with potential buyers; the authors provide a bunch of juicy historical stories, derived from lawyer diaries during this period, on exactly how such transactions took place. Railroads were frequently being hounded by patent trolls who tried to catch them unaware, and traveling patentbuyers crossed the Midwest and South suing farmers for using unlicensed barbed wire or milk buckets. Patents took an average of three years to be processed by the early 1900s, and the patenting rate was near an all time high. Firms regularly bought patents just so their competitors wouldn’t have them.

This is all to say that, to the extent we are worried about certain aspects of the patent system today, looking to history may be a useful place to begin. “Submarine patents”, acquired by trolls and kept unused until a particularly juicy potential violator has started to earn large profits, don’t appear to have been too prominent at the turn of the century – given how lucrative this business appears, perhaps an investigation of why they only appear in the present would be worthwhile. The role of a patent as a saleable piece of knowledge, allowing non-producers to do useful research and then sell that research to a firm who finds it useful, surely has some role, as Arrow pointed out in his famous 1962 essay. When patents instead simply add transaction costs or result in thickets, discouraging activity by true innovators, something has gone awry. And when something goes wrong in the world, it is rarely the case that history can offer us no useful guidance.

2012 working paper (No IDEAS version). Prof. Sokoloff passed away from cancer at a young age in 2007, so this may become his final published paper – it incorporates a great number of ideas he worked on throughout his career, so that would be a fitting tribute.

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