The unstated presumption in the pro-patent argument is that such costs will be more than offset by the benefits that flow from increased innovation (that is, higher productivity), but this is not guaranteed. Indeed, in mid-19th-century Europe, the influential anti-patent movement, famously championed by the British free-market magazine, The Economist, objected to the patent system on the grounds that its costs would be higher than its benefits.[11]
Of course, the 19th-century anti-patent liberal economists were wrong. They failed to recognize that some forms of monopoly, including the patent, can create more benefits than costs. For example, infant industry protection does produce inefficiency by artificially creating monopoly power for domestic firms, as free-trade economists are only too pleased to point out. But such protection may be justified, if it raises productivity in the long run and more than offsets the damages from the monopoly it creates, as I have repeatedly explained in the earlier chapters. In exactly the same manner, we advocate the protection of patents and other intellectual property rights, despite their potential to create inefficiency and waste, because we believe they will more than compensate for those costs in the long run by generating new ideas that raise productivity. But accepting the potential benefits of the patent system is different from saying that there is no cost involved. If we design it wrong and give too much protection to the patentee, the system can create more costs than benefits, as is the case with excessive infant industry protection.
The inefficiency from monopolies and the waste from ‘winner-takes-all’ competition are neither the only, nor the most important, problems with the patent system, and other similar forms of intellectual property rights protection. The most detrimental impact lies in its potential to block knowledge flows into technologically backward countries that need better technologies to develop their economies. Economic development is all about absorbing advanced foreign technologies. Anything that makes it more difficult, be it the patent system or a ban on the export of advanced technologies, is not good for economic development. It is as simple as that. In the past, the Bad Samaritan rich countries themselves understood this clearly and did everything to prevent this from happening.
As water flows from high to low, knowledge has always flowed from where there is more to where there is less. Those countries that are better at absorbing the knowledge inflow have been more successful in catching up with the more economically advanced nations. On the other side of the fence, those advanced nations that are good at controlling the outflow of core technologies have retained their technological leadership for longer. The technological ‘arms race’, between backward countries trying to acquire advanced foreign knowledge and the advanced countries trying to prevent its outflow has always been at the heart of the game of economic development.
The technological arms race started to take on a new dimension in the 18th century, with the emergence of modern industrial technologies that had much greater potential for productivity growth than traditional technologies. The leader in this new technological race was Britain. Not least because of the Tudor and Georgian economic policies that we discussed in chapter 2, it was rapidly becoming Europe’s, and the world’s, leading industrial power. Naturally, it was reluctant to part with its advanced technologies. It even set up legal barriers to technology outflows. The other industrialising countries in Europe, and the US, had to violate those laws in order to acquire superior British technologies.
This new technological arms race was started in full spate by John Law (1671–1729), the legendary Scottish financier-economist who even became France’s finance minister for just under a year. Law was named the ‘moneymaker’ by the author of his popular biography, Janet Gleeson.[12] He was a moneymaker in more than one sense. He was an extremely successful financier, making huge killings on currency speculation, setting up and merging large banks and trading companies, getting royal monopolies for them and selling their shares at huge profits. His financial scheme was too successful for its own good. It led to the Mississippi Bubble – a financial bubble three times bigger than the contemporary South Sea Bubble discussed in chapter 2 – which wrecked the French financial system.* Law was also known as a great gambler with an incredible ability to calculate the odds. As an economist, he advocated the use of paper money backed by a central bank.[13] The idea that we can make worthless paper into money through government fiat was a radical notion then. At the time, most people believed that only things that have a value of their own, like gold and silver, could serve as money.
John Law is today remembered mainly as the financial wheeler-dealer who created the Mississippi Bubble, but his understanding of economics went far beyond mere financial engineering. He understood the importance of technology in building a strong economy. While he was expanding his banking operation and building up the Mississippi Company, he also recruited hundreds of skilled workers from Britain in an attempt to upgrade France’s technology.[14]
At the time, getting skilled workers was the key to accessing advanced technologies. No one could say, even today, that workers are mindless automata repeating the same task in the manner so hilariously but poignantly depicted by Charlie Chaplin in his classic film, Modern Times. What workers know and can do matters greatly in determining a firm’s productivity. In earlier times, though, their importance was even more pronounced, since they themselves embodied a lot of technologies. Machines were still rather primitive, so productivity depended very much on how skilled the workers who operated them were. The scientific principles behind industrial operations were poorly understood, so technical instructions could not be written down easily in universal terms. Once again, the skilled worker had to be there to run the operation smoothly.
Galvanized by Law’s attempt to poach skilled workers and also by a similar Russian attempt, Britain decided to introduce a ban on the migration of skilled workers. The law, introduced in 1719, made it illegal to recruit skilled workers for jobs abroad – known as ‘suborning’. Emigrant workers who did not return home within six months of being warned to do so would lose their right to lands and goods in Britain and have their citizenship taken away. Specifically mentioned in the law were industries such as wool, steel, iron, brass, other metals and watch-making; but in practice the law covered all industries.[15]
With the passage of time, machines became more complex and began to embody more technologies. This meant that getting hold of key machinery started to become as important as, and increasingly more important than, recruiting skilled workers. Britain introduced a new act in 1750 banning the export of ‘tools and utensils’ in the wool and silk industries. The ban was subsequently widened and strengthened to include the cotton and linen industries. In 1785, the Tools Act was introduced to ban the export of many different types of machinery.[16]
12
J. Gleeson (2000),
*
Law was born into a banking family in Scotland. In 1694, he had to flee to the Continent after killing a man in a duel. In 1716, after years of lobbying, Law was given a licence by the French government to set up a note-issuing bank, Banque Générale. His main backer was the Duc d’Orléans, Louis XIV’s nephew and the then regent for the child king, Louis XV, the great-grandson of Louis XIV. In 1718, Banque Générale became Banque Royale, with its notes guaranteed by the king. In the meantime, Law bought the Compagnie du Mississippi (the Mississippi Company) in 1717 and floated it as a joint-stock company. The company absorbed other rival trading companies and, in 1719, became Compagnie Perpetuelle des Indes, although it was still commonly called Compagnie du Mississippi. The company had a royal monopoly on all overseas trading.With Law launching high-profile settlement schemes in Louisiana (French North America) and generating rumours vastly exaggerating their prospects, a speculative frenzy on the company’s stocks started in the summer of 1719. The share price rose by more than 30 times between early 1719 and early 1720. So many large fortunes were made so quickly – and subsequently lost in many cases – that the term