The Patent System and the Market for Technology

It is fashionable these days to attribute a number of economic evils to patents, from high product prices to restraints on innovation to excessive litigation. There is nothing new about these complaints. They have been recycled since the creation of the US patent system and do not seem to have lost much of their force despite more than two centuries of sustained technological progress. Steve Haber and I argue in our introduction to The Battle Over Patents (2021) that these complaints persist because patents have been, and are, important weapons in producers’ internecine struggles over the surplus from innovation. Because the patent system is a product of these self-interested battles, it is highly imperfect. But so are all the alternative ways of protecting intellectual property and encouraging intellectual discovery that countries have tried over the centuries—awards and prizes, buy outs, and industrial policy more generally. Problems notwithstanding, patent systems offer advantages over these alternatives, and most nations have adopted them as a consequence.

It is also fashionable these days to attribute a number of ills to the administrative state, without regard for the contributions that individual agencies might make to the efficient functioning of the economy. Rebecca Eisenberg and I have been inspired by Ronald Coase’s famous query—why does so much economic activity occur within firms rather than in the market—to ask the analogous question of why so much adjudication occurs within administrative agencies rather than in courts. We investigate this question by examining the Patent Office’s handling of interference cases—inter partes proceedings that determined which of a competing set of inventors could show priority of invention. In “How Bureaucracies Learn: Innovation in the Patent Office’s Handling of Interferences, 1836-1940” (2024), we document the remarkable levels of innovation and trial-and-error experimentation that reshaped the office’s internal adjudication procedures and dramatically sped up the resolution of interferences.

Most of my work with Dhanoos (Dee) Sutthiphisal and the late Kenneth Sokoloff focused on elucidating an important advantage of the patent system—the support it offers for the exchange of technology and technological information. Most recently in “Patent Alchemy: The Market for Technology in U.S. History,” we argue that technologically creative people are not always as skilled at developing and commercializing inventions as they are at devising them in the first place. The patent system facilitates a division of labor that allows inventors to specialize in what they do best and spin off the other tasks to those with appropriate capabilities. This division of labor can occur in the market (inventors can sell off or license their intellectual property to other individuals or firms) or it can occur within the firm (R&D departments can generate ideas that are put to use in other parts of the enterprise). When Ken and I first started to work on this topic in the early 1990s, the conventional view was that the division of labor within the firm was more efficient. That view has since been discredited, in large part as a result of our work (see, for example, “Inventors, Firms, and the Market for Technology in the Late Nineteenth and Early Twentieth Centuries”), but it lives on ideologically in the strategy of labeling businesses that develop new technologies but do not use them to manufacture goods themselves as “trolls”—as if profiting from selling or licensing inventions was in some way illegitimate. Much of our work has been geared toward understanding the advantages and disadvantages of both ways of organizing technological discovery and how the balance between them has shifted over the last century and a half. Viewed in long-run perspective, as we do in “The Reorganization of Inventive Activity in the United States in the Early Twentieth Century,” the post-war dominance of large-firm R&D was atypical—the result of government antitrust policy and financial regulation, combined with generous federal support for research by private businesses. When federal largess declined in the 1970s, businesses reverted to something more like the symbiotic relationship between large-firm R&D and the market for technology that had prevailed earlier twentieth century, though now with more regulatory protection for small firms that sell or license technology in the market. Opposition to “trolls,” led by large firms that do not want to have to buy technology from these small fry, may undermine that protection.

Related Publications:

Rebecca Eisenberg and Naomi R. Lamoreaux, “How Bureaucracies Learn: Innovation in the Patent Office’s Handling of Interferences, 1836-1940” (2024).

Stephen H. Haber and Naomi R. Lamoreaux, eds., The Battle Over Patents: History and the Politics of Innovation (New York: Oxford University Press, 2021).

Naomi R. Lamoreaux, Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, “Patent Alchemy: The Market for Technology in U.S. History,” Business History Review 87 (Spring 2013): 3-38.

Naomi R. Lamoreaux, Kenneth L. Sokoloff, and Dhanoos Sutthiphisal, “The Reorganization of Inventive Activity in the United States in the Early Twentieth Century,” in Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy, eds. Dora Costa and Naomi R. Lamoreaux (Chicago: University of Chicago Press, 2011), 235-74.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “The Rise and Decline of the Independent Inventor: A Schumpeterian Story?” in The Challenge of Remaining Innovative: Lessons from Twentieth Century American Business, eds. Sally H. Clarke, Naomi R. Lamoreaux, and Steven Usselman (Stanford: Stanford University Press, 2009) 43-78.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, eds., Financing Innovation in the United States, 1870 to the Present (Cambridge: MIT Press, 2007).

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “The Market for Technology and the Organization of Invention in U.S. History,” in Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies, eds. Eytan Sheshinski, Robert J. Strom, and William J. Baumol (Princeton: Princeton University Press, 2007), 213-43.

Naomi R. Lamoreaux, Margaret Levenstein, and Kenneth L. Sokoloff, “Mobilizing Venture Capital during the Second Industrial Revolution: Cleveland, Ohio, 1870-1920,” Capitalism and Society 1 (2006), issue 3, article 5.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “Intermediaries in the U.S. Market for Technology, 1870-1920,” in Finance, Intermediaries, and Economic Development, eds. Stanley L. Engerman, Philip T. Hoffman, Jean-Laurent Rosenthal, and Kenneth L. Sokoloff (New York: Cambridge University Press, 2003), 209-46.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “Market Trade in Patents and the Rise of a Class of Specialized Inventors in the Nineteenth-Century United States,” American Economic Review, Papers and Proceedings, 91 (May 2001): 39-44.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “The Geography of Invention in the American Glass Industry, 1870-1925,” Journal of Economic History 60 (Sept. 2000): 700-29.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “The Geography of the Market for Technology in the Late-Nineteenth- and Early-Twentieth Century United States,” Advances in the Study of Entrepreneurship, Innovation, and Economic Growth 11 (Greenwich, Conn.: JAI Press, 1999), 67-121.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “Inventors, Firms, and the Market for Technology in the Late Nineteenth and Early Twentieth Centuries,” in Learning By Doing in Firms, Markets, and Countries, eds. Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin (Chicago: University of Chicago Press, 1999), 19-57.

Naomi R. Lamoreaux and Kenneth L. Sokoloff, “Long-Term Change in the Organization of Inventive Activity,” Proceedings of the National Academy of Sciences 93 (Nov. 1996): 12686-92.