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Published by EH.Net (December 2023).

B. Zorina Khan. Inventing Ideas: Patents, Prizes, and the Knowledge Economy. New York: Oxford University Press, 2020. xiii + 462 pp. $35.99 (paperback), ISBN 978-0190936082.

Reviewed for EH.Net by Mike Andrews, University of Maryland Baltimore County.

 

At a time when there are calls to create an entrepreneurial state (Mazzucato, 2013) and industrial policy is at the forefront of public policy discussions (Gross & Sampat, 2022; Juhász, Lane, & Rodrik, 2023), Zorina Khan’s 2020 book Inventing Ideas provides a spirited defense of a “decentralized” approach to promoting innovation. Khan, a professor of economics at Bowdoin College and research associate at the National Bureau of Economic Research, has devoted her career to understanding the institutions that promote or hinder innovation, and her decades of erudition are apparent in this book.

As Khan argues, the benefits of a decentralized innovation system, best exemplified by the use of patents, is that it does not rely on a centralized administrative body to pick winning and losing technologies. Instead, under a patent system individual inventors pursue the innovations that they believe are most likely to result in commercial profit. By “letting a thousand flowers bloom,” the market selects the most valuable ideas. As the Westminster Review put it in 1889:

“Give a man a sum of money for his invention, and you run the risk of paying him either too much or too little. Give him a patent, and you secure the invention for the public, while his remuneration in money is absolutely determined according to its value. If the invention enrich him, it must also have benefited the nation. If the invention be a delusion, the public suffers no loss and the patentee reaps no gain” (Khan, 2020, p. 381).

Additionally, patents are property, which means they can be bought, sold, or used as collateral, with markets for patents allowing inventions to get into the hands of the people best positioned to put them into practice. Khan also argues that patent systems are more open and inclusive than most prize systems, which tend to be biased towards elites when allocating awards. Indeed, Khan’s vision of the innovation process is fundamentally democratic:

“the lives of ordinary people were transformed by a populous army of equally ordinary peers in pursuit of returns in the marketplace—from the patentees of paperclips (one of the truly great inventions, in my view) and paper bags to windshield wiper reservoirs” (Khan, 2020, p. 402, emphasis in original).

Contrast this vision of innovation with Mokyr’s (2002) “Cortesian army,” the small cadre possessing elite “upper-tail human capital” that, Mokyr and others argue, were the primary drivers of innovation during the early stages of modern economic growth (Meisenzahl & Mokyr, 2012; Mokyr, 2005; Squicciarini & Voigtländer, 2015).

Khan’s book is not only a spirited defense of decentralized innovation, but a strong argument for using historical research to shed light on modern policy debates. Each chapter of the book draws on historical analyses—most based on Khan’s own prior work—to argue that patent systems are more effective at promoting innovation than are centralized systems. The first two chapters outline the main argument and explain the benefits of patents relative to prize systems. Chapter 3 further explores weaknesses of prize systems, and provides numerous examples from around the world over several centuries. Chapter 4 analyzes prolific inventors in Britain from 1750 to 1930 and concludes that, rather than being drawn from aristocracy, great inventors emerged from the ranks of ordinary people, attracted by potential returns in the marketplace. Chapters 5-7 examine elite prize-granting institutions in Britain, France, and the U.S., respectively, highlighting their elitism and frequent failure to identify the most world-changing innovations.

The remaining chapters examine particular aspects of patent and prize systems, as well as broader innovation policy. Chapter 8 drives home the point that inventors are driven by financial gains by analyzing the changing direction of patenting during wartime. Chapter 9 examines the geography of patents and prize awards and argues that patents create larger geographic knowledge spillovers than do prizes. Chapter 10 examines women inventors and concludes that prize systems typically failed to reward the types of technologies created by women, whereas women inventors do appear in the patent record (although at far lower rates than men). Chapter 11 examines global markets for patents. Chapter 12 examines how the U.S. legal system adapted to support changes in technology throughout the 19th and early 20th centuries, with common law itself exemplifying a flexible decentralized institution. Finally, Chapter 13 compares legal and other institutional regimes that affected innovation in the U.S., Britain, and France.

While Khan stresses the value of using quantitative historical data, one of the most useful contributions of the book is its closer examination of many common stories about patents and prizes. As one example, consider Napoleon’s famous prize for improved food preservation, won by Nicolas Appert in 1810. Appert’s solution, which involved using heat to seal glass bottles, was not very practical in a military setting. “Appertized” foods never became a major commercial success, whereas the British and American discoveries of canning gained widespread adoption (Khan, 2020, p. 77). (In fact, it is likely that Napoleon never even held such a prize competition. Instead, Appert successfully petitioned the French government for an award for an innovation he had created decades earlier; see Howes 2023.)

Or consider the French government’s purchase of the “Daguerreotype” patent, made famous as the canonical example of a patent buyback in Kremer (1998). It turns out Daguerre never acquired a French patent, but in 1839 he did convince the French government to award him a large sum in exchange for keeping the technology in France. Daguerre then promptly patented the invention in Britain under another name. By 1841, better photographic technologies had been developed that would rapidly make Daguerre’s technology obsolete (Khan, 2020, p. 78-80). Khan’s book is full of fascinating anecdotes like these. I learned a lot, and many of the examples will make their way into my teaching.

So what, then, are we to conclude about Khan’s main argument? I suspect Khan is largely correct: when it comes to promoting innovation, decentralized systems like patents have much to recommend them relative to centralized systems like prizes. But, as is usually the case, the devil is in the details.

As Khan demonstrates here and in her previous work (especially Khan 2005), there is a great deal of variation across patent systems, and some are better at promoting innovation than others. Is the worst possible patent system better at promoting innovation than the best possible prize system? I doubt it. The length and breadth of patent protection, the level of the fees, the structure of the examination and publication process, and more all matter for a patent system’s performance. Many critiques of the current U.S. patent system do not claim that decentralized systems cannot successfully promote innovation. Rather, they argue that the current system grants patents for inventions that are insufficiently novel, that patents are overly broad, that inventors provide insufficient disclosure of their ideas, and that the patent system has been captured by deep-pocketed corporations (Bessen & Meurer, 2008; Jaffe & Lerner, 2004; Merges, 1999); in short, that many of the benefits of a democratic decentralized system highlighted by Khan have been lost over the last half century.

For prize systems, it matters whether the administrators obtain an exclusive license to the invention, what outside options are available to runners-up for the prize, how much discretion administrators have in deciding winners, etc. While many of these issues are touched on in the book, the nuance in how these factors affect the comparison of patents to prizes is often lacking. One wonders, for example, if Elisha Gray (regarded by many as the true inventor of the telephone) would agree with Khan’s assertion (pg. 69) that the wasteful duplication of effort is less of a problem with patents than it is with prizes; surely this depends on the breadth of patents and how runners-up are treated by the prize administrators.

Moreover, the organizing question of the book—should we use patents instead of prizes?— assumes a false dichotomy. Thriving innovation ecosystems utilize both methods to promote innovation. Throughout the book, Khan points out the adverse selection inherent in prize systems: if an inventor has a choice between obtaining a patent or a prize, they will only choose the prize if the patent is unlikely to have much commercial value. This is framed as a weakness of innovation prizes, but this form of selection is part of the point. In many cases, we want to incentivize the creation of technologies for which there may not be a ready market. And while some prize systems are administered by centralized governments, many are conducted by participants in decentralized markets who also engage in patenting. Netflix, with its famous 2006-2009 prize to improve its movie prediction algorithm, is probably the best-known example (see Khan’s discussion of the Netflix prize on pp. 88-90). For Netflix and other private firms, the decision of whether or not to administer an innovation prize is really a question of whether to conduct R&D in-house or outsource it to others.

I had a few other quibbles with the book. While each section is individually interesting, I’m not sure the organization of topics within or across chapters always made the most sense. In some of the tables and figures, it is difficult to determine exactly what is being measured or where the data come from. And the style is a bit polemical for my tastes, although far less so than many of the works Khan argues against (e.g., Boldrin and Levine 2008, Mazzucato 2013).

On the positive side, the book contains appendices that provide Khan’s “summary judgment on innovation prizes” and detail on various sources of innovation-related data; these appendices alone are worth the price of the book. And as noted above, the book is full of fascinating anecdotes and clever uses of historical data. Regardless of whether one agrees with Khan’s conclusions, or the conviction with which she draws them, this book brings a much-needed perspective to the debate about how societies should promote innovation. I encourage anyone interested in innovation policy to read it.

References

Bessen, J., & Meurer, M. J. (2008). Patent failure: how judges, bureaucrats, and lawyers put innovators at risk. Princeton: Princeton University Press.

Boldrin, M., & Levine, D. K. (2008). Against intellectual monopoly. Cambridge: Cambridge University Press.

Gross, D. P., & Sampat, B. N. (2022). Crisis innovation policy from World War I to COVID-19. Entrepreneurship and Innovation Policy and the Economy , 1 , 135-181.

Howes, A. (2023). Age of invention: myth-busting innovation prizes. (https://www.ageofinvention.xyz/p/age-of-invention-myth-busting-innovation, accessed Dec. 19, 2023).

Jaffe, A. B., & Lerner, J. (2004). Innovation and its discontents: how our broken patent system is endangering innovation and progress, and what to do about it. Princeton: Princeton University Press.

Juhász, R., Lane, N., & Rodrik, D. (2023). The new economics of industrial policy. Annual Review of Economics, forthcoming .

Khan, B. Z. (2005). The democratization of invention: patents and copyrights in American economic development, 1790-1920. New York: Cambridge University Press.

Khan, B. Z. (2020). Inventing ideas: patents, prizes, and the knowledge economy. Oxford: Oxford University Press.

Kremer, M. (1998, November). Patent buyouts: a mechanism for encouraging innovation. Quarterly Journal of Economics, 113 (4), 1137-1167.

Mazzucato, M. (2013). The entrepreneurial state: debunking public vs. private sector myths. London: Anthem Press.

Meisenzahl, R. R., & Mokyr, J. (2012). The rate and direction of invention in the British Industrial Revolution: incentives and institutions. In J. Lerner & S. Stern (Eds.), The rate and direction of inventive activity revisited (pp. 443-479). Chicago: University of Chicago Press.

Merges, R. P. (1999, Spring). As many as six impossible patents before breakfast: property rights for business concepts and patent system reform. Berkeley Technology Law Journal, 14 (2).

Mokyr, J. (2002). The gifts of Athena: historical origins of the knowledge economy. Princeton: Princeton University Press.

Mokyr, J. (2005). Long-term economic growth and the history of technology. In P. Aghion & S. Durlauf (Eds.), Handbook of economic growth (Vol. 1, pp. 1113-1180). Amsterdam: Elsevier.

Squicciarini, M. P., & Voigtländer, N. (2015, November). Human capital and industrialization: evidence from the Age of Enlightenment. Quarterly Journal of Economics, 130 (4), 1825-1883.

 

Mike Andrews (https://sites.google.com/site/michaeljeffreyandrews) is an assistant professor of economics at the University of Maryland Baltimore County. His research focuses on innovation, and much of his work uses historical patent data and historical natural experiments to understand the effects of public policies on innovation.

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