The Patent System as the Basis for Trade in Technology

The patent system provided the institutional framework within which a market for technology evolved. Consciously designed with the aim of encouraging more investment in inventive activity, the U.S. system granted inventors an exclusive property right to the use of their discoveries for a fixed term of years. Responsibility for enforcing these rights was left to the courts, especially before an 1836 revision in the law empowered the Patent Office to examine applications for originality, and the courts responded by quickly developing an effective set of principles that protected the property rights of patentees and also those who purchased or licensed patented technologies (8).

Although one purpose of the patent system was to stimulate invention, another was to promote the diffusion of technological knowledge. The law required all patentees to provide the Patent Office with detailed specifications for their inventions (including, where appropriate, working models). The end result was a central storehouse of information about technology that was open to all who wished to exploit it. In addition, the very act of establishing secure property rights in invention promoted the diffusion of technological knowledge. With the protection offered by the patent system, inventors had an incentive to promote their discoveries as widely as possible so as to maximize the returns from their ideas, whether they commercialized them themselves or traded the rights to others. Because infringers were subject to severe penalties, moreover, firms could not risk investing in a new technology without finding out whether others already controlled the relevant property rights. They therefore had to keep well informed about technological developments in other sectors of the economy as well as geographic areas, and it is likely that technologies diffused more rapidly as a consequence and also that the resulting cross-fertilization was a potent stimulus to technological change overall.

Finally, two distinctive features of the U.S. law encouraged more widespread participation in the patent system and, at the same time, trade in technological information. First, the much lower costs of obtaining a patent in the United States than in other countries meant that a larger fraction of inventions would have expected yields high enough to warrant being patented. Second, the United States was exceptional for much of the nineteenth century in reserving for the first and true inventor the right to patent an invention (9). Inventors in the United States, therefore, did not have to be as protective of their discoveries as their counterparts elsewhere; they could even risk revealing critical technological information before the award of the patent to negotiate the early sale of their invention.

Although the patent system provided a legal framework conducive to trade in technology, there were nonetheless a variety of information and transactions costs that limited the market for inventions. Over the nineteenth century, however, a number of institutional and organizational changes reduced these costs, and in so doing, encouraged an expansion of trade. One of the most important was an explosion of published sources of information about patented technologies. The Patent Office itself published an annual list of patents issued, but private publications emerged early in the nineteenth century to improve upon this service. For example, Scientific American featured articles about technological developments, printed complete lists of patents issued on a weekly basis, and provided readers with copies of patent specifications for a small fee. Over time, moreover, in industry after industry specialized trade journals appeared that kept producers informed about patents of interest.

Patent agents and solicitors also became important channels through which individuals and firms far from Washington could access information about and take advantage of recent discoveries. Their numbers began to mushroom in the 1840s, first in the vicinity of Washington and then in other urban centers, especially in the Northeast. Solicitors in different cities linked themselves through chains of correspondent relations not unlike those that characterized the banking system of that era. Although the original function of these solicitors was to shepherd applications for patents through the official review process and to defend previously issued patents in interference and infringement proceedings, they soon began to act as intermediaries for trade in technologies. Solicitors advertised their services in journals like Scientific American, offering to find buyers for patents on a commission basis, and we know from manuscript records of assignment contracts that it was not uncommon for inventors actually to transfer control to such agents (10). Although we are not yet able to construct a precise index of the volume of trade in patented technologies for the period before 1870, it is clear that such exchange began to take off during the middle of the nineteenth century, at the same time as these new information channels and intermediaries were developing. Not only was there a substantial increase in the number of assignments filed at the Patent Office, but a new focus on the rights of assignees and licensees is evident in the court cases of the period (8).

The Growth of Trade in Patents and Specialization at Invention

Inventive activity, as reflected in rates of patenting per capita, first began to increase rapidly with the beginnings of industrialization early in the nineteenth century. This initial phase of secular increase in invention was characterized by distinctive geographic patterns. In particular, the rise in patenting was concentrated in districts that were near urban centers or along navigable waterways that provided low-cost transportation to markets. These patterns, together with the pro-cylicality of patenting rates and other evidence that patenting was sensitive to demand, have led scholars to suggest that expanding markets helped induce the acceleration of invention and technological change associated with the onset of economic growth, and that differential access to these markets was an important contributor to the opening up of pronounced geographic variation in inventive activity (1, 3, 5).

The responsiveness of patenting to market demand may have been related to the small scale of enterprise and the broad familiarity of the population with the relatively simple and labor-intensive technologies characteristic of the era; in such a context, the “supply” of inventions could be elastic. Indeed, studies of the careers of early inventors suggest that they were drawn from rather ordinary occupations, were far from specialized at inventive activity, and were usually involved in the commercial exploitation of their discoveries. Changes in these patterns began to be apparent about the middle of the nineteenth century, however, as the share of inventors from more technical occupations rose—paralleling the spread of mechanization and the rise in capital intensity across the manufacturing sector (4, 5, 11).

Despite significant changes in technology and in the backgrounds of inventors, as well as the massive extension of product markets associated with the building of the railroads, marked geographic differentials in patenting persisted over time. As shown in Table 1 for the period from 1840 to 1910, not only did patenting rates remain lower in regions like the South and the West North Central than in the Northeast, but there were substantial differences between New England and the Middle Atlantic as well. Although the regional gaps narrowed considerably over time, most of the convergence occurred late—after 1890.

Among the factors that might contribute to the persistence of such regional differences in inventive activity are institutions that have location-specific effects on the costs of contracting

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