The Rational Optimist (30 page)

Money is certainly important in driving innovation, but it is by no means paramount. Even in the most entrepreneurial of economies, very little saving finds its way to innovators. Victorian British inventors lived under a regime that spent a large proportion of its outgoings on interest payments, in effect sending a signal that the safest thing for rich folk to do with their money was to collect rent on it from taxes on trade. Today, plenty of money is wasted on research that does not develop, and plenty of discoveries are made without the application of much money. When Mark Zuckerberg invented Facebook in 2004 as a Harvard student, he needed very little R&D expenditure. Even when expanding it into a business, his first investment of $500,000 from Peter Thiel, founder of Paypal, was tiny compared with what entrepreneurs needed in the age of steam or railways.

Intellectual property?

Perhaps property is the answer. Inventors will not invent unless they can keep at least some of the proceeds of their inventions. After all, somebody will not invest time and effort in planting a crop in his field if he cannot expect to harvest it and keep the profit for himself – a fact Stalin, Mao and Robert Mugabe learned the hard way – so surely nobody will invest time and effort in developing a new tool or building a new kind of organisation if he cannot keep at least some of the rewards for himself.

Yet intellectual property is very different from real property, because it is useless if you keep it to yourself. The abstract concept can be infinitely shared. This creates an apparent dilemma for those who would encourage inventors. People get rich by selling each other things (and services), not ideas. Manufacture the best bicycles and you profit handsomely; come up with the idea of the bicycle and you get nothing because it is soon copied. If innovators are people who make ideas, rather than things, how can they profit from them? Does society need to invent a special mechanism to surround new ideas with fences, to make them more like houses and fields? If so, how are ideas to spread?

There are several ways to turn ideas into property. You can keep the recipe secret, as John Pemberton did for Coca-Cola in 1886. This works well where it is hard for rivals to ‘reverse-engineer’ your secrets by dismantling your products. Machinery, by contrast, betrays its secrets too easily. The British pioneers of industrial textile manufacture largely failed in their attempts to use trade secrecy laws to protect themselves. Though customs officers searched foreigners’ possessions for plans of machinery, New Englanders like Francis Cabot Lowell sauntered innocently about the mills of Lancashire and Scotland ostensibly for his health while frantically memorising the details of Cartwright power looms, which he promptly copied on his return to Massachusetts. The dye industry relied mostly on secrecy till the 1860s when analytical chemistry reached the point where rivals could find out how dyes were made; it then turned to patents.

Or, second, you can capture the first-mover advantage, as Sam Walton, the founder of Wal-Mart, did throughout his career. Even as his retailing rivals were catching up, he was forging ahead with new cost-cutting tactics. Intel’s dominance of the microchip industry, and 3M’s of the diversified technology industry, were based not on protecting their inventions so much as on improving them faster than everyone else. Packet switching was the invention that made the internet possible, yet nobody made any royalties out of it. The way to keep your customers, if you are Michael Dell, Steve Jobs or Bill Gates, is to keep making your own products obsolete.

The third way to profit from invention is a patent, a copyright or a trademark. The various mechanisms of intellectual property are eerily echoed in the apparently lawless and highly competitive world of real recipes, recipes devised by French chefs for their restaurants. There is no legal protection for recipes: they cannot be patented, copyrighted or trademarked. But try setting up a new restaurant in Paris and pinching the best recipes from your rivals and you will rapidly find that this is not common land. As Emmanuelle Fauchart discovered by interviewing ten
chefs de cuisine
who had restaurants near Paris, seven with Michelin stars, the world of haute cuisine operates according to three norms, unwritten and unenforceable by law, but no less real for that. First, no chef may copy another chef’s recipe exactly; second, if a chef tells a recipe to another chef, the second chef may not pass it on without permission; third, chefs must give credit to the original inventor of a technique or idea. In effect, these norms correspond to patents, trade secrecy contracts and copyright.

Yet there is little evidence that patents are really what drive inventors to invent. Most innovations are never patented. In the second half of the nineteenth century neither Holland nor Switzerland had a patent system, yet both countries flourished and attracted inventors. And the list of significant twentiethcentury inventions that were never patented is a long one. It includes automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers. By contrast, the Wright brothers effectively grounded the nascent aircraft industry in the United States by enthusiastically defending their 1906 patent on powered flying machines. In 1920, there was a logjam in the manufacture of radios caused by the blocking patents held by four firms (RCA, GE, AT&T and Westing house), which prevented each firm making the best possible radios.

In the 1990s the US Patent Office flirted with the idea of allowing the patenting of gene fragments, segments of sequenced genes that could be used to find faulty or normal genes. Had this happened, the human genome sequence would have become an impossible landscape in which to innovate. Even so, modern biotechnology firms frequently encounter what Carl Shapiro has called a ‘patent thicket’ when they try to develop a treatment for a new disease. If each step in a metabolic pathway is subject to a patent, a medical inventor can find himself negotiating away all his rewards before he even tests his idea. And the last patent holder to yield commands the highest potential pay-off.

Something similar happens in mobile telephony, where the big mobile firms have to fight their way through patent thickets to bring any innovation to market. At any one moment these firms are involved in scores of lawsuits as plaintiffs, defendants or interested third parties. The result, says one observer, is that ‘lobbying and litigating may be a more profitable way to win market share than innovating or investing’. Today, the biggest generators of new patents in the US system are ‘patent trolls’ – firms that buy up weak patent applications with no intention of making the products in question, but with every intention of making money by suing those who infringe them. Research in Motion, the Canadian company that manufactures BlackBerries, had to pay $600m to a small patent troll called NTP that did no manufacturing itself but had acquired contested patents with the aim of profiting from their defence.

Michael Heller’s analogy for the patent trolls is to the state of the river Rhine between the decay of Holy Roman imperial power and the emergence of modern states. Hundreds of castles grew up all along the Rhine, one every few miles, each occupied by a little robber baron princeling living off tolls exacted from boats travelling along the river. The collective effect was to stifle trade on the Rhine, and repeated attempts to form a league to lift the burden from the trade to the benefit of all came to naught. In the twentieth century there was a possibility in the early days of flight that every landowner would extract a toll from every aircraft that crossed his ‘searchlight’ of vertical ownership of the air just like the Rhine robber barons. In this case, good sense prevailed and the courts quickly extinguished such property rights in the sky.

Modern patent systems, despite attempts at reform, are all too often a gauntlet of phantom tollbooths, raising fees from passing inventors and thus damaging enterprise as surely as real toll booths damage trade. Yet, of course, some intellectual property does help. A patent can be a godsend to a small firm trying to break into the market of an established giant. In the pharmaceutical industry, where government insists on a massively expensive regime of testing for safety and efficacy before a product launch, innovation without some form of patent would be impossible. In one survey of 650 R&D executives from 130 different industries, only those in the chemical and pharmaceutical industries judged patents to be effective at stimulating innovation. Yet even here there are questions to be raised. Even when such firms spend their patent profits on research rather than on marketing to exploit the temporary monopoly, most of the money goes towards me-too drugs for diseases of Westerners.

Copyright law, too, is becoming a thicket. Zealous enforcement, especially in the music and film industry has made it increasingly hard for people to share, borrow and build upon even small snippets of invented art. Smaller and smaller fragments of songs are copyrighted, and the US courts have made an attempt to lengthen the lives of copyrights to the life of the author plus seventy years (it is fifty today). Yet in the eighteenth century when composers had no copyright in their music, Mozart was not discouraged: only one country had allowed the copyrighting of music – Britain – and the result was a decline in Britain’s already dismal ability to produce composers. Just as newspapers have derived little of their income from licensing copyrights, so there will be ways to charge people for music and film in the digital world.

Intellectual property is an important ingredient of innovation, when innovation is happening, but it does very little to explain why some times and places are more innovative than others.

Government?

The government can take credit for a list of big inventions, from nuclear weapons to the internet, from radar to satellite navigation. Yet government is also notorious for its ability to misread technical change. When I was a journalist in the 1980s, European government bodies bombarded me with boastful claims for their latest initiatives in supporting various parts of the computer industry. The programmes had catchy names like Alvey, or Esprit or ‘fifth-generation’ computing, and they were going to help push European industry into the lead. Usually modelled on some equally abortive idea from MITI, the then fashionable but flat-footed Japanese ministry, they invariably picked losers and encouraged companies down cul-de-sacs. Mobile phones and search engines were not among their possible futures.

In America there was a truly breathtaking outburst of government-led idiocy at the same time that went under the name of Sematech. Based on the premise that the future lay in big companies making memory chips (which were increasingly being made in Asia) it poured $100 million into chip manufacturers on condition that they stopped competing with each other and pooled their efforts to stay in what was fast becoming a commodity business. An 1890 anti-trust act had to be revised to allow it. Even as late as 1988 dirigistes were still criticising the fragmented companies of Silicon Valley as ‘chronically entrepreneurial’ and incapable of long-term investing. This was when Microsoft, Apple, Intel and (later) Dell, Cisco, Yahoo, Google and Facebook – chronically entrepreneurial all, in their garage or bedroom beginnings – were just laying the foundations for their global dominance at the expense of precisely the big companies dirigistes admired.

Not that any lessons were learned. In the 1990s, governments poured their efforts into such dead-ends as high-definition television standards, interactive television, telecommuting villages and virtual reality, while technology quietly got on with exploring the possibilities of wi-fi, broadband and mobile instead. Innovation is not a predictable business and it responds poorly to dirigisme from civil servants.

So although government can pay people to stumble upon new technologies – satnav and the internet were by-products of other projects – it is hardly the source of most innovation. During the late twentieth century, as companies sewed innovation into their culture and as industrial behemoths repeatedly fell prey to upstarts, most public-sector agencies just trundled on as before, neither trying to become especially innovative them selves, nor dying to make way for new versions of themselves. The idea of a government agency that fears having its mission pinched by another government agency is so peculiar as to be unimaginable. If food retailing in Britain had been left to a National Food Service after the Second World War, one suspects that supermarkets would now be selling slightly better spam at slightly higher prices from behind Formica counters.

Of course, there are some things, like large hadron colliders and moon missions, that no private company would be allowed by its shareholders to provide, but are we so sure that even these would not catch the fancy of a Buffett, a Gates or Mittal if they were not already being paid for by taxpayers? Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone? Public funding crowds out the possibility of knowing an answer to that question. A large study by the Organisation for Economic Co-operation and Development concluded that government spending on R&D has no observable effect on economic growth, despite what governments fondly believe. Indeed it ‘crowds out resources that could be alternatively used by the private sector, including private R&D’. This rather astonishing conclusion has been almost completely ignored by governments.

Exchange!

The perpetual innovation machine that drives the modern economy owes its existence not mainly to science (which is its beneficiary more than its benefactor); nor to money (which is not always a limiting factor); nor to patents (which often get in the way); nor to government (which is bad at innovation). It is not a top-down process at all. Instead, I am going to try now to persuade you that one word will suffice to explain this conundrum: exchange. It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.