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.

Lucky Breaks for the Port

history

Several lucky breaks provided a huge push for Singapore growth, escalating volume of east-west trade, and raising the importance of Singapore as a trading hub. For 50 years from 1830, the world saw several significant changes that changed the global economic conditions and the shifting political weights leading to further entrenchment of Singapore’s position a major global port.

Improvements in seafaring technologies

Seafaring technology was improving rapidly after the emergence of Singapore as a port; the first experimental steamships started in the early 1800s and then by 1830s, regional steamboats were running around in Europe as well as along the coasts and rivers of United States of Americas. Ocean-going steamships followed and the first steamship (by Peninsular & Oriental Steamship Co.) carrying mails (passengers, and parcels) arrived in Singapore in 1845.

Steamships shortened the voyage between the east and west significantly, whilst it used to take months (and would vary according to seasons) to sail from London to Singapore, the advent of steamships reduced this journey to approximately 40 days throughout the year. Improvements in the next decade would shave the time down to a single month. This drove up not only the trading activities but also encouraged more visitors to Singapore who would hang around for a short-term stay.

Opium Wars & opening of China market

The end of the first Opium War concluded in 1842 with the signing of the Treaty of Nanking that forcibly opened up the Chinese market to imports from the west. The Chinese market proved attractive to the Europeans and even the Americans who were (unfortunately) buying huge volumes of opium in Turkey to be sold in China. Some of these opium of course ended up within the Singapore market but that is a story for another day.

The ceding of Hong Kong to the British provided a permanent base in the South China sea, further providing for this whole string of territories that help to connect the west to the east for British merchants. Trade between the west and the east grew significantly as a result and these trade flows all will have to pass through Singapore at least for some services.

The turmoil during the First and Second Opium wars also contributed to mass immigration of Chinese in search of more stable lives and also jobs. This particular wave of immigration ensured the dominance of the Chinese ethnic group on the island and also provided a huge youthful workforce with a taste for hardship and hunger for improvements. This labour base ensured that trade services develop and there were sufficient crew to service the incoming vessels.

Opening of Suez Canal

The opening of Suez Canal in 1869 provided further push to east-west trade through shortening of the voyage between Europe and Asia. Trading ships no longer had to sail down to the Cape of Good Hope and up again towards the Gulf of Aden. Trade volume through Singapore almost doubled just within the single year progressing from 1869 to 1870.

The status of a free port continued to attract trading ships as well as merchants. The rival ports of Jakarta (then called Batavia) and Manila levied tariffs and thus were less attractive. American, Jewish, Armenian, Indian, Chinese and Arab traders started setting up trading houses in Singapore. The diversity and multiculturalism was at the heart of this colony; just as its growth and development was powered by the world events. In that sense, Singapore was never quite ‘left-behind’ nor ever unplugged from this world system after the British established themselves.

Singapore Economic History

history

During my days doing my Masters, I had always wanted to start working on studying Singapore’s Economic history, primarily because we should be learning from the way we developed and not blindly attributing it to some brilliance on the part of individuals or organisation. To break down the black box and understand the practice of growth is something I endeavour as an Economist while the reluctance to attribute our development to specific individuals but rather to consider it down to naturalistic observations about policy, culture, and zeitgeist is my responsibility as an informed voter.

For one, the idea of Singapore as a location suited for trade really started way earlier than we initially had thought; and it has gone by various names: Sabana (2nd Century), Pulau Ujong (3rd Century), Simha-pura (transliterated somehow to ‘Singapura’ – 11th-13th Century and used later on as well), Tamasek (around 1330s), Temasek (circa 1689) and finally Singapore. It gained some importance as a port in 14th Century with trading by merchants as far as China, gaining some immigrants along the way; subsequently as a regional port under the Sultanate of Johor in 16-17th Century. In 1613 however, some Portuguese supposedly destroyed a settlement around the main river, killing most commercial activities on the island until Sir Stamford Raffles landed in 1819, reviving the port status of the territory.

It was indeed, no special original brilliance of Sir Stamford Raffles that helped Singapore become positioned as a entre-port; rather, his effort was the recognition of the need for British navy protection, garnering the resources required to build up this port and rallying support to keep this port a tax-free one that would help enjoy endless flow of ships and traders. The status of a free port was definitely innovation within the British Empire at that time. This particular innovation we inherited much later and became an important economic policy.