National Innovation Systems and Innovation in Nations

Selective case studies of the post–World War II economy have given rise to claims that national innovation systems, or dirigiste linkages between the state, universities, and industry, are required for technological change and economic growth. The long-run patterns of innovation in the leading nations of Britain, France, and the United States suggest otherwise. Administered systems, where key economic decisions were made by elites, the state, and other privileged groups, typically were associated with monopsonies and the misallocation of resources and talent. By contrast, the American experience highlights the central role of markets in ideas and decentralized incentives for innovation, in concert with flexible open-access adjacent institutions, in promoting useful knowledge and sustained technological progress.

Designing Women

This study of over 12,000 women inventors in Britain, France, and America reveals new insights about gender and creativity, and about incentives and institutions for innovation. Women tended to specialize in improvements of consumer final goods, the look and feel of existing items, and design-oriented products at the boundaries of art and technology. While their creativity was often directed toward improving family welfare within the household, many of their contributions proved to be valuable in the market for inventions. Family firms provided an important conduit that overcame social obstacles to their entrepreneurial efforts. By contrast, women were significantly less likely to be awarded prizes for their innovations, so it is not surprising that they typically opted not to participate in administered systems.

Innovations in Law

Administered systems involve regulation, while efficient markets in ideas require secure property rights and appropriate adjacent institutions. Disruptive technologies typically lead to institutional bottlenecks, which then require accommodations in legal rules and their enforcement. U.S. policy toward innovation and enterprise has always been distinguished by the central role of law and the judiciary. The evolution of legal rules and standards in the United States reveals a remarkable degree of flexibility and responsiveness to innovations. In the short run, the common law economized on legal adjustment costs through “adjudication by analogy,” whereas, in the long run, socioeconomic changes wrought by major inventions ultimately produced more fundamental adjustments in adjacent institutions. This institutional elasticity can be contrasted with the lack of transparency and rigidity that characterized most administered innovation institutions.

Prestige and Profit

The Royal Society of Arts offered honorary and cash awards for creativity. The society initially was averse to patents and prohibited the award of prizes for patented inventions. Inventors of items that were valuable in the marketplace typically chose to obtain patents and to bypass the prize system. Owing to such adverse selection, prizes were negatively related to subsequent areas of important technological discovery. The society acknowledged that its efforts had been “futile” because of its hostility to patents and switched from offering inducement prizes toward lobbying for reforms to strengthen the patent system. The findings suggest some skepticism is warranted about claims that elites and non-market-oriented institutions generated technological innovation and long-term economic development.

Elites and Useful Knowledge in Britain

A longstanding claim attributes economic growth and technological change to social and scientific elites, who possess special knowledge that is unavailable to the general population. This chapter considers the significance of scientific training, costly human capital, and different types of knowledge during British industrialization by assessing the backgrounds, education, and inventive activity of major contributors to technological advances. The results show that scientists, engineers, or technicians were not well represented among the cadre of important British inventors, and many innovators remained unspecialized until very late in the nineteenth century. Informal institutions like apprenticeship and learning on the job efficiently helped creative individuals to increase their skills and productivity. Costly investments in specialized human capital and esoteric knowledge were less important than incentives for creativity, flexibility, and the ability to make incremental adjustments to produce innovations that are appropriate for prevailing conditions.

Introduction

Knowledge and ideas, incentives, and institutions are central for understanding technological change and long-term economic growth. This book bridges the current disconnect between the economics of technological change and the analysis of institutions. The discussion draws on detailed information about the experience of over one hundred thousand ingenious men and women in Britain, France, and the United States, whose inventions helped to create the modern knowledge economy. These results overturn longstanding myths of invention about elites, innovation prizes, and “entrepreneurial states,” and instead highlight the pivotal role of property rights and markets in ideas in explaining technological progress and the wealth of nations.

Selling Ideas

An extensive global market in patent rights and patented inventions helped creative men and women to increase their returns from inventive activity. Prominent multinational corporations further depended on portfolios of patents to acquire and maintain their domestic and worldwide competitive advantage. Markets in ideas aided the transfer of technology across the United States, Britain, Germany, Canada, Spain, and Japan. Patterns in the sale of patents and foreign patenting were responsive to national differences in incentives, legal rules, and institutions. The results shed light on central debates in economic development, including the net benefits of tailoring patent institutions to individual circumstances, relative to adherence to harmonized international standards.

“Creative Destruction”

The strongest case for administered innovation systems relies on government sponsorship of research and development and technological discoveries during World War II and the modern postwar era. The American Civil War provides a useful counterpoint that demonstrates the effectiveness of markets in ideas even during the severe disruptions of a devastating battle on domestic soil. The Civil War was characterized by a high degree of technological creativity for military-related inventions and innovations, to a far greater extent than during the twentieth century. Both the sourcing of new technologies and military procurement were decentralized and subject to market forces. The market incentives for private inventors to engage in trial-and-error experimentation created an impressive portfolio of radical new technologies from which military leaders chose the most appropriate to support their strategies.

Conclusion

The modern knowledge economy had its start in the United States when, for the first time in world history, an intellectual property clause was included in a national Constitution. This strong endorsement for property rights and decentralized markets in ideas reflected a revolution in thinking about the sources of creativity and economic progress, which conventional economic theories about innovation and growth have yet to fully capture. European administered innovation systems assumed that elites, scarce knowledge, and costly human capital inputs were the primary sources of useful ideas and productivity advances. Administered arrangements failed to induce inventions at appropriate prices, perpetuated errors because of a lack of monitoring and feedback, and were associated with rent-seeking and significant deadweight losses. By contrast, market-oriented policies in the United States generated increasing returns associated with its larger and more diverse population of inventors and useful ideas, which encouraged self-sustaining endogenous growth and a global technological advantage that has persisted for well over a century.

Of Apples and Ideas

New ideas can help to generate further inventions if the knowledge is readily available for others to use. However, the degree to which nonpayers can benefit from knowledge varies widely, and depend on the specific conduits that enable access and use. The empirical analysis shows that differences in the structure of innovation institutions influenced the spread of technological knowledge spillovers. Prizes were ineffective in generating external benefits from knowledge spillovers. By contrast, patent systems enhanced the diffusion of information for both patented and unpatentable innovation. These outcomes reflected the design of patent institutions, which explicitly incorporate mechanisms for systematic recording, access, and dispersion of technical information.