Market Trade in Patents and the Rise of a Class of Specialized Inventors in the 19th-Century United States

It has long been recognized that one of the original aims of the U.S. patent system was to stimulate technological development by granting inventors temporary monopoly rights to their discoveries. This paper argues that the U.S. system fostered inventive activity in another important way as well, by providing the institutional infrastructure necessary for the growth of a market for technology. Early 19thcentury inventors often had to play a direct role in the commercial development of their ideas, a situation that constrained their ability to focus on the generation of new technologies (B. Zorina Khan and Sokoloff, 1993). The growth of a market in patents not only made invention a more attractive activity by raising retums, but also enabled creative individuals to extract income from their ideas by selling them off, making it possible for them to specialize in the inventive activities for which they had a comparative advantage. Ever since Adam Smith, economists have understood that one of the most fundamental processes at work in economic development is the specialization in the use of resources that the growth of market trade makes possible. Given the importance of the generation of new technologies to economic growth, as well as the long-standing recognition that investment in invention, like other types of investment activity, is responsive to material returns, the lack of research on the dynamics of these processes for the case of technology is somewhat puzzling. The answer may simply be that this topic did not seem very relevant in a world dominated by large-scale businesses that integrated both the generation and commercialization of new technologies. In recent years, however, venture capital has flowed to firms that focus on inventive activity and sell off or license the resulting intellectual property to enterprises better positioned to exploit its commercial advantages. In other words, it now seems that, whatever the coordination benefits of conducting these various activities within a single large firm, investors are realizing that there are also potential gains to be derived from a division of labor across organizations. This specialization of function is not, however, a modern innovation in organization. On the contrary, as we will show, such a division of labor was commonplace by the late 19th century, a period which, like the present age, was characterized by rapid technological change. The institutional foundation for market trade in technology was the U.S. patent system, created in accordance with the Commerce Clause of the Constitution. Although influenced by British law, the framers of the U.S. system self-consciously made a number of important innovations. Among them were dramatically lower fees, impersonal administrative procedures for handling applications, and the requirement that a patentee be the "first and true" inventor anywhere in the world (patentees also had to be humans not firms). These provisions extended the protection of property rights to a much broader range of inventions than obtained in Britain or elsewhere in Europe and, when coupled with effective enforcement, meant that inventors could advantageously reveal information about their ideas to prospective buyers even before they received a patent grant. Moreover, uncertainty about the value of the patents decreased dramatically after the law was reformed in 1836, replacing a registration system (which left to civil litigation the resolution of questions of originality, novelty, and appropriate scope) by an examination system in which technically * Department of Economics, University of California, Los Angeles, 90095, and National Bureau of Economic Research; Lamoreaux is also affiliated with the Department of History at UCLA. We thank Marigee Bacolod, Lisa Boehmer, Yael Elad, Brian Rivera, Ludmila Skulkina, Matthew Wiswall, and Tamara Zavaliyenko for research assistance. Research support was provided by the National Science Foundation and the UCLA Academic Senate.