Costs of Innovation

I was updating some of the contents of this personal website and ended up re-reading the paper I wrote during my wonderful course in US Business and Economic History at Stern Business school in the Summer of 2014, taught by Prof Richard Sylla. I realised that in the table of comparison on the intellectual property systems of UK and US, I failed to illustrate the magnitude of difference in costs of filing patents under each system!

In 1624 up till 1852, it could have costs 100 pounds sterling in order to file in England. To file across jurisdiction of Great Britain to include Ireland and Scotland would have set an inventor back by up to 380 pounds sterling! In contrast, the US system was set up in 1790, charging only 4-5 US dollars per patent, increasing up to 35 US dollars in 1836.

Now the comparison was completely moot without including the exchange rates at that point of time! Perhaps my way of describing the system kind of glossed over it without it being a problem for Prof Sylla but today, almost 6 years after writing that paper, I want to set that straight.

So as usual, FRED saves the day with its wonderful datasets – they actually had a monthly exchange rate dataset that went as far back as 1791! For full disclosure, I would like to point out that they constructed it from Bank of England’s data on Three Centuries of Macroeconomic Data – incredible undertaking by those folks I must say.

In any case, we could safely consider the exchange rates to be around 5 US dollar to 1 pounds sterling, save for the slight fall in value of pounds during the Napoleonic wars and the huge fall in value of US dollars starting 1861 when the American Civil War started.

With that exchange rate in mind, we now see that in 1791, we now know it would have cost 100 times more to file a patent covering England compared to one that covers Federal United States (then only 13 colonies, and bits of other territories one must recognise). And of course, this gap went down to around 16 times by 1836 but still, it was a huge difference! No wonder Charles Babbage who invented the Difference Engine was quoted by Dutton (1984, p.70) describing the system in this manner: ‘the most exalted officers of the State in the position of a legalized banditto’.

That aside however, today, companies’ management systems that puts managers and bosses as the supreme single ‘buyer’ of ideas (monopsony for ideas as Gary Hamel of London Business School pointed out in The Future of Management) is costing innovation more. Unlike the British patent system, which was repeatedly boycotted by inventors such as Charles Babbage, the traditional systems of management often could ‘hide away’ innovations and good ideas simply fail to get the resources or actions it needs to prove themselves or even be realised!

In my paper, I argued that the merits of the American system of intellectual property as it had evolved, was not so much the price for a patent, or the fact it operated by statutes rather than case laws (and therefore is effective even when it is not yet challenged in courts), it was the power by which it incentivised inventors and innovators to share and spread their ideas around. This allowed for the society to build more ideas upon them and even combine various ideas together to form new ones – each layers protected by the IP rights and allowing the system of agreements to form for the various inventors to share in the benefits of the resulting composite ideas. The corporation, in stifling ideas with its system of management, imposes huge costs on innovation and suffers for it. Often, it is not just good ideas which are lost but also idea-generators and good employees who leaves in frustration.