The Patent Controversy

Today one of the most controversial issues in economic policy is that of patent law. Is a patent just an extension of property rights to the realm of ideas? Or is it an unwarranted interference by the government into the rights of individuals who have purchased goods and services to use them as they see fit? Should the Western system of patents be extended worldwide? Or should we get rid of patents entirely? Is the patent system responsible for modern miracle drugs? Or is it to blame for the millions dying of HIV in Africa? Do patents lead to greater innovation and economic growth? Or do they kill the goose that lays the golden egg?

The issue of whether patents are genuine property rights or unwarranted government interference cannot of course easily be answered by a natural experiment. We will leave that discussion to philosophers. The impact of patents on innovation does have an objective answer. In this case history instead of nature has been kind enough to provide us with a wonderful natural experiment. This experiment took place in the county of Cornwall, England, between 1772 and 1852. It was there, in the extreme southwest of England, in the wet depths of the Cornish copper and tin mines, far removed from the supply of coal in Wales, that the steam engine was pioneered.

To examine innovation in steam technology, we need a measure of how good a steam engine is. One important measure is the amount of work delivered by a given amount of fuel. This can be measured by the duty of a steam engine: the number of pounds of water that can be lifted one foot for each 94 pounds of coal consumed.

In 1772 steam engines were of the so-called Newcomen design of which the best had a duty of 10 million foot-pounds (10M). In 1777 Matthew Boulton and James Watt began selling the first steam engines with a separate condenser. These initially had a duty of 18M, rising by 1792 to a peak of 26M. There things rested until 1814 when the use of the high-pressure design of Richard Trevithick led to engines with a duty of 55M. The duty then rose relatively continuously until it reached a peak of 110M in 1852.

To summarize: During the 42 years from 1772 to 1813 duty rose 3.8 percent per year; during the 38 years from 1814 to 1852 duty rose more than twice as fast—8.5 percent per year. The evolution of the duty is charted in the figure. The state of innovation is best represented by the best engine currently being produced, but for completeness the average and minimum duty of constructed engines is reported. The decline in duty growth after 1852 reflects both the general decline of the Cornish mining industry and the more difficult conditions in which steam engines were forced to operate due to the deepening of the mines.

As it happens there is one critical difference between the earlier period and the later period. By patenting the separate condenser Boulton and Watt, from 1769 to 1800, had almost absolute control on the development of the steam engine. They were able to use the power of their patent and the legal system to frustrate the efforts of engineers such as Jonathan Hornblower to further improve the fuel efficiency of the steam engine. By way of contrast, and fortunately, Trevithick did not patent his equally innovative high-pressure design.

Ironically, not only did Watt use the patent system as a legal cudgel with which to smash competition, but his own efforts at developing a superior steam engine were hindered by the very same patent system he used to keep competitors at bay. An important limitation of the original Newcomen engine was its inability to deliver a steady rotary motion. The most convenient solution, involving the combined use of the crank and a flywheel, relied on a method patented by James Pickard, which prevented Watt from using it. Watt also made various attempts at efficiently transforming reciprocating into rotary motion, reaching, apparently, the same solution as Pickard. But the existence of a patent forced him to contrive an alternative less-efficient mechanical device, the sun and planet gear. It was only in 1794, after the expiration of Pickard’s patent, that Boulton and Watt adopted the economically and technically superior crank. The impact of the expiration of Watt’s patents on his empire may come as a surprise as well. Far from being driven out of business, Boulton and Watt for many years were able to charge a premium over the price of other steam engine manufacturers.

Here we see clearly the upside and the downside of the patent system in action. The upside is that it may be the case that the prospect of a 31-year monopoly induced Watt to spend three and a half years of his life—between late 1764, when he first was asked to repair a steam engine, and mid-1768, when he applied for patents on his improved design—working to improve steam technology.

The downsides are two. The first is that the reward to success bears no relation to the cost of invention. In what respect is it necessary, reasonable, or fair to grant a 31-year monopoly and make a man fabulously wealthy because he spent a few years working on a project that benefited his fellow man? Certainly this kind of inducement was not needed for Trevithick, whose contribution to steam technology raised the duty 110 percent as against Watt’s contribution, which raised the duty only 80 percent.

The second downside of the patent system is the devastating effect it has on incremental innovation. From 1786 to 1800 there was no increase in the duty of steam engines at all, as Boulton and Watt successfully sought to prevent competition by suppressing innovation. This should be a cautionary note for people who think that the current wave of patent litigation triggered by a system of software patents created by the courts is likely to have a beneficial impact on software innovation.

Collaborative Innovation

For the 11 years following the end of the Boulton and Watt monopoly, Cornish mining activities underwent a period of slackness, as the mine adventurers were content with the financial relief coming from the cessation of the premiums they had paid to Bolton and Watt. As a consequence they neglected the maintenance and the improvement of their engines. This situation lasted until 1811, when a group of mine captains decided to begin the publication of a monthly journal reporting the relevant technical characteristics, the operating procedures, and the performance of each engine. Their explicit intention was twofold. First, the publication of the reports permitted the rapid individuation and diffusion of best-practice techniques. Second, it introduced a climate of competition among the engineers entrusted with the different pumping engines, with favorable effects on the rate of technical progress. Joel Lean, a highly respected mine captain, was appointed as the first engine reporter. The journal would later be called Lean’s Engine Reporter. During the 31 years after 1811 this collaborative competitive effort at innovation raised duty by more than the great “breakthrough” of Watt ever did.

It is worth remarking another important feature of the process of technical change in Cornish engines during the collaborative period. Most engines were single-cylinder, high-pressure, single-acting engines, with a plunger pump of the type originally erected by Trevithick in 1812. Interestingly enough, however, alternative designs were never completely ruled out. For example, in different periods, engineers such as Arthur Woolf and James Sims continued to experiment with compound engines. Throughout this period, the development of the Cornish engine remained a fluid state and this facilitated a more thorough exploration of alternative designs.

The astute reader will no doubt notice that the collaborative innovation occurring after the expiration of the Watt patents resembles nothing so much as modern open-source software development. Like with open-source software, altruism and socialism played no role—just good old-fashioned capitalist incentives. Engineers were recruited by captains of the mine on a one-off basis to build and design an engine. Engineers were in charge of the design and they supervised the erection of the engine that was commissioned to them. They also provided directions for day-to-day working and maintenance of the engines they were entrusted with. Thus the publication of technical information concerning the design and performance of different steam engines permitted the best engineers to consolidate their reputation and improve their career prospects. Over time, this practice gave rise to a professional ethos favoring sharing and publication of previous experiences.

Much of the free/open-source-software industry operates this way today, with software engineers competing for future business through the quality of their current innovations. Sharing of information is a key part of this competition. If Linus Torvalds, creator of the Linux kernel, is not nearly so rich as Bill Gates, he is nevertheless richer than most of us. (See Michele Boldrin and David K. Levine, “Open-Source Software: Who Needs Intellectual Property?” The Freeman, January 2007.)

Even the modern controversy over the current effort of the Free Software Foundation to limit software patents through the General Public License Version 3 finds reflection in the earlier Cornwall experience. Familiar with the negative impact of the Watt patents on innovation, Cornwall mine engineers were reluctant to patent their inventions. From 1781 to 1852 Cornish residents took out a grand total of 15 patents on steam technology—against 994 patents on steam technology in all of England during that period. Will it surprise you to learn that the area with the fewest patents also was the area that contributed the most to the innovation and development of steam technology?

One may wonder why development in an obscure corner of England should draw our attention. As it happens, the design of fuel-efficient high-pressure steam engines did not only serve to improve the efficiency of pumping water out of mines in one small region. It is the fact that efficient high-pressure engines can be made light and compact and do not require much weight of fuel that made possible such modest advances as . . . the steam train, the steam boat, the steam jenny, and the steam just-about-everything-else. In short—the steam engine that we imagine as the centerpiece of the Industrial Revolution, the key link that took us from riding horses to being frequent fliers—was not the product of the inventive genius of James Watt. When the Boulton and Watt monopoly expired in 1800 steam engines were used only to pump water out of mines. The earth-shattering innovation of widely usable steam engines was the product of the efforts of Joel Lean and dozens of other equally anonymous Cornwall mining captains and engineers. It is equally a tribute to their steady innovation without making use of patents.

In the very title of his article in The Freeman of October 2007, Frank van Dun asks, “Can We Be Free If Reason Is the Slave of the Passions?” His article is uncommonly long and gauzy for a Freeman piece; and his citations to David Hume’s Treatise of Human Nature are few and imprecise, putting the reader to some trouble to locate the full contexts of the remarks quoted or paraphrased. Still, van Dun’s message comes across: disparagement of Hume’s classical-liberal credentials (even though Ludwig von Mises and F. A. Hayek admired and drew inspiration from Hume’s sociopolitical philosophy).

In asking “Can We Be Free . . . ?” van Dun is not referring to the still-thorny philosophical issue of free will versus determinism. He is presumably asking about personal and political freedom, about life in a free society. And he is implying, still rather gauzily, that Hume’s observations about reason and the passions tend to undercut the case for freedom.

Van Dun misunderstands and puts the worst possible interpretation on what Hume says. Hume does not disparage reason, understood as factual observation and logic; he does not glorify action and policy based on sheer emotion or whim. Not at all, as his descriptions of the requirements for a free and prosperous society illustrate. Far from disparaging reason, Hume is asserting the distinction between reason and the passions—between is and ought, as he says, or, in modern terminology, between positive propositions and value judgments; and he is explaining how the former can bear on the latter.

Despite what van Dun says, a value judgment (an ought, a judgment involving the passions) cannot be rigorously derived from positive propositions (deliverances of reason) alone. (By alone I mean: taken with absolutely no admixture of value judgment.) The necessary value judgments may be so tame and intuitive that we hardly are aware of making them; but some value content in the premises, even if tacit, is necessary to arrive at some further and perhaps more specific ought.

Van Dun suggests that “If A is B, then you ought to believe that A is B.” But not so fast. Readiness to accept true propositions is conducive to a satisfying personal life and to a well-functioning society. This is a plausible factual generalization, but no value judgment has been introduced so far. To reach van Dun’s ought, we also need a value judgment (a “passion”), like approval of satisfactions in life or of the happiness to which a well-functioning society conduces (including value judgments connected with “satisfactions” and “well-functioning”).

John Searle purported to show “How to Derive an Ought from an Is”; R. M. Hare replied (articles reprinted in K. Pahel and M. Schiller, eds., Readings in Contemporary Ethical Theory, 1970). The outcome of the discussion was that the purported derivation does not work.

In many contexts a sharp distinction between is and ought is irrelevant; but in some it is important, as in pinning down and possibly clearing up the bases of disagreement about, say, a policy issue. One person may favor a minimum-wage law and another oppose it. Are they disagreeing about the probable consequences of the law, which is a factual issue, or about the acceptability of agreed probable consequences, even weighing side effects against desired effects? Clear discussion requires that the respectability of disagreement about ultimate values not confer respectability on disagreement about issues of fact and logic. (I cite myself reluctantly, but on is/ought and Hume, see my Ethics as Social Science, Elgar, 2001, especially pp. 17–35, 131–34.)

In short, Hume made distinctions conducive to clear thinking, which in turn is conducive to a free society and personal freedom. Van Dun’s rather gauzy accusations are unwarranted.

—Leland B. Yeager
Professor Emeritus of Economics, Auburn University
by e-mail

Frank van Dun replies:

I thank Professor Yeager for taking the trouble to read and to comment on my text on Hume in the October issue of The Freeman. Of course, Professor Yeager is wrong to attribute to me the intention to “disparage” Hume’s classical-liberal credentials. I am sure he will agree with me that criticism does not imply disparagement and that skepticism should not stop at the door of the father of modern skeptical philosophy.

I am well aware that Hayek admired and drew inspiration from Hume’s sociopolitical philosophy but, however much I admire both Hayek and Hume and drew inspiration from their writings, I do not think that they provided the strongest intellectual bases for a defense of freedom in the relations and interactions of human persons. To what degree Mises admired Hume is a much more difficult question to answer. He certainly appreciated Hume’s utilitarianism and in particular his seminal essay on the problem of “neutral money,” but then he also chided him and other early British economists for providing an opening for “the enemies of reason.” In a sentence dripping with irony, Mises wrote: “. . . David Hume, the Utilitarians, and the American Pragmatists are certainly not guilty of having exaggerated the power of man to attain truth. It would be more justifiable to blame the philosophy of the last two hundred years for too much agnosticism and skepticism than for overconfidence in what could be achieved by the human mind” (Human Action, 1998 Scholar’s Edition, p. 73). Of course, we can only wonder how Hume would have reacted to Mises’s praxeology; if the reactions of his present-day followers are any indication, his too might well have been negative.

I fear Professor Yeager has not understood my remarks on the Is-Ought question. At the risk of writing a piece that is “uncommonly long and gauzy” for The Freeman, I went out of my way to stress that it is not possible to derive an ought-statement from an is-statement in a system of formal logic, for in such a system “deduction” proceeds by rules of transformation: “is” and “ought” are different forms, and there is no rule applicable to all cases to transform the one into the other that does not risk a loss of truth value. Hume was right about that, just as he was right to say that from an is-statement one cannot formally derive a statement of causal necessity. One may agree with Professor Yeager that a formal derivation is a “rigorous” derivation, but one need not thereby commit oneself to the view that only a formal derivation can be rigorous.

What I did claim is that human reason is as solidly established on the ought-side as it is on the is-side of Hume’s famous gap. There is therefore no need to formally derive the one from the other or to consider one of them more basic than the other. It is my view that there are both is-statements and ought-statements that no human speaker can logically deny, even though the statements themselves are not formal tautologies. (Incidentally, I would argue that Mises’s praxeology, his insistence that it is the explication not of a fanciful idea but of, for humans, the undeniable fact that man acts, is based on the ability of human minds to grasp the limits that their own rational faculties impose on the scope for skepticism. No matter how much a hypothetical superhuman intelligence might disagree, for us humans, human action is an ultimate given because for any one of us his or her capacity to act and think is an ultimate given.) Thus where the limitations of Hume’s philosophy compel him to bridge the gap between is and ought by means of merely synthetic psychological generalizations or contingent habits, other philosophers point to the fact that it is the same mind that generates both of these categories of thought.

Hume’s discussion of is versus ought and reason versus the passions inaugurated a way of modeling human decision-making that is at once simple (and therefore easy to teach to large classes of students) and in certain contexts plausible, but nevertheless, I would say, false. I do not dispute Professor Yeager’s insistence on the importance of making clear conceptual distinctions, but there is a danger of taking such distinctions as proofs of the existence of different entities. For example, the distinction between “means” and “ends” is an old one, but it does not warrant the hypothesis that there is one entity (“passion”) that posits the ends and another (“reason”) that works out the most efficient means for achieving them. Of course, in most hierarchical organizations, that is effectively what happens: there are those who decide about the ends or goals and then leave it to the experts in their service to come up with the means. However, I would not say that the model applies generally to how human beings make the decisions that get them through the day, let alone through life. Yet when I look around, I see that “Leave it to the experts” is promoted everywhere, in the schools and in political propaganda (Hume’s “education and the artifice of politicians”) as well as in the no less ubiquitous business propaganda.

From an early age on, people are urged to let others lead their lives for them and to settle for mere want-satisfaction rather than for having lives of their own. Hume may not have foreseen the rise of the cult of the expert, but there is little in his philosophy with which one might criticize it. After all, if reason is and ought to be the slave of your passions then why not dump your slave for another one with better papers? Professor Yeager may not agree, but for me these developments hold an ominous threat to personal freedom as well as to the possibility and sustainability of a free society. Of course, this is too vast a subject to deal with in a reply to a letter.

One last remark: In meetings with other classical liberals I hear hardly a thing about Hume that does not confirm his “classical-liberal credentials” (as Professor Yeager puts it). However, in my usual habitat, both in academia and elsewhere, where classical liberals are an almost invisible minority, most of the people who advance Hume’s or Humean arguments tend to be social democrats or evolutionary socialists. It may be easy to argue that their views do not conform to Hume’s intentions or “philosophical politics” (Duncan Forbes’s felicitous expression), but it is far from easy to argue that Hume’s theory of human nature does not provide support for their views. Hayek’s Hume is not the only Hume we have to reckon with. We had better take account of that.

Is Price Stability a Desirable Goal of Monetary Policy?

Gerald O’Driscoll is correct (“Subprime Monetary Policy,” The Freeman, November 2007) in blaming the present mortgage crisis on the fact that investors who have engaged in risky ventures have come to expect the Fed to bail them out. But to explain the crisis, one must ask why such risky ventures were undertaken in the first place. . . . The problem stems from the fact that the Federal Reserve expanded the money supply earlier and induced investors to undertake risky ventures. . . .

O’Driscoll writes, “In a vibrant market economy with technological innovation and ever-new profit opportunities, monetary policy that maintains true price stability in consumer goods requires substantial monetary stimulus.” Apparently O’Driscoll believes that “price stability” is not only desirable but necessary. . . . Fed policy from the beginning was based on the belief, which apparently O’Driscoll shares, that a prosperous economy requires monetary stimulus, that lending must be facilitated by reducing interest rates and making money “easy.” Today’s Fed chairman, whoever he or she may be, engages in a continual juggling act—trying to keep the Fed’s interest/discount rate low to encourage business activity without stimulating higher prices, or raising the Fed’s interest/discount rate without slowing business down. This is inevitable, given the Fed’s goal of maintaining an “elastic currency.”

—Bettina Bien Greaves
by e-mail

Gerald P. O’Driscoll replies:

I appreciate the comments Bettina Bien Greaves made on my article. She misinterprets my argument, however. The remainder of the paragraph from which she quotes, and the following, concluding paragraph, make clear that I am critical of the Greenspan-era policy of the Fed. I point out that it led to asset bubbles and capital misallocation. I predict that the “Greenspan-era gains against inflation will then prove to be only temporary.”

In a more technical version of this paper, I analyze what monetary policy would avoid the problem of asset bubbles and misallocated capital. I conclude that the prices of consumer goods (final output) must be allowed to decline over time. I believe that conclusion is implicit in the final two paragraphs of my Freeman article.

Did the Internal-Combustion Engine Make Us Healthy?

I was not aware that The Freeman engaged in the publication of speculative fiction. . . . I am referring to the article titled “Thank You, Internal-Combustion Engine, for Cleaning up the Environment,” written by Dwight R. Lee (October 2007). There are at least a couple of outright errors in the article. The first of these is the inclusion of typhus, yellow fever, and diphtheria as diseases that could be transmitted via horse manure. . . . Typhus and yellow fever rely upon insect vectors for transmission and diphtheria is transmitted directly from person to person. . . . As to the assertion that it was not changes in the public-health infrastructure: such a bold statement demands at least one reference. A quick search on the Internet calls up a reference to a decrease of ~90% in the death rate from cholera in London based solely on changing the source of water to one which was “quite free from the sewage of London.” This was in the 1850s, just a bit before the internal-combustion (IC) engine could influence anything (http://tinyurl.com/yua75e).

The speculative fiction aspect of the article is the excursion the author makes into imagining what the world would be like without the IC engine. His straw man is that animal labor would have continued to dominate the world. I am disappointed that he appears to be wholly unaware of the existence of the steam or external-combustion (EC) engine. The author might be served to look up the work of James Watt, Robert Fulton, and George Stephenson. This list is extremely cursory. As an example of the competition to the IC engine, please note that the Stanley Motor Carriage Company produced a line of vehicles sold to the public and often referred to as “Stanley Steamers.” This is relevant not only because the Stanley Steamer was initially more successful than the IC-engine automobile, but also in regards to the aspect of pollution. . . .

—Mark E. Anderson
by e-mail

Dwight Lee responds:

Mark E. Anderson faults me for writing “speculative fiction,” wrongly portraying the connection between horse manure and certain diseases, not understanding the importance of public-health infrastructure, and not considering alternatives to the internal-combustion engine.

I do not claim much medical knowledge, but I am under the impression that filth is a health hazard whether it transmits diseases directly or through other agents, such as insects, rats, and people. Certainly horse manure was a major contributor to the filth people were exposed to before the internal-combustion engine greatly reduced the horse population. The quotation in my article from Robert Fogel seems adequate to convince one that the horse manure eliminated by internal-combustion engines was a greater health hazard than the exhaust from those engines.

I never claim, as Mr. Anderson states, that public-health infrastructure was not responsible for reducing certain diseases or health risk in general. Clearly it did, and I should have explicitly acknowledged that fact. But it seems reasonable that reducing the filth in the environment, which the public-health infrastructure had to deal with, deserves much of the credit for the continuing drop in numerous diseases that occurred as reliance on the internal-combustion engine expanded.

Mr. Anderson seems to believe my biggest mistake is in assuming that the choice was between either the internal-combustion engine or continuing with the horse. It is true that I don’t mention other technologies, such as the steam engine, which might have done almost as much to improve the environment as the internal-combustion engine if the latter had never come along. But the swimmer who reaches the drowning child and pulls him to safety gets credit for the rescue even if, in his absence, another would have saved the child. Also, by giving credit to the internal-combustion engine for its contribution to the environment, I avoided getting even deeper into the type of “speculative fiction” that Mr. Anderson faults me for.