State of Innovation

Patents and Innovation Economics

The Rational Optimist: Excellent Book, Disfigured by Open Source Utopianism

The author, Matt Ridley, has written an excellent book that is epic in the scope of issues he tackles.  The book covers why homo sapiens thrived while other members of the homo genus fail.  He shows that on average the human condition has gotten consistently better and this increase in wealth has been especially true in the last 200 years.  He destroys the noble savage myth.  He shows the intellectual failings of Marxism, environmentalism, self sufficiency, and renewable energy.  His two main themes underlying these vast topics are: 1) trade leads to division of labor, which leads to invention and 2) the inexorable march of human progress.

Despite Mr. Ridley’s incredible breadth of knowledge, there is a logical gap in his first thesis when he attempts to explain the industrial revolution and why it took off in England.  This logical gap is the result of his misunderstanding of intellectual property.

This misunderstanding of intellectual property is most likely due to his open source utopianism.  This utopianism leads the book to conclude “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356.  Even with this imperfection, this is an incredible book that I highly recommend to anyone.

Population Density – Good or Bad for Wealth Creation?

The book argues that population density is necessary for trade and division of labor, which is the route to economic prosperity.  It also argues that the division of labor leads to inventions, which leads to further specialization.  Specialization requires a large enough market to support it and as a result population density is the friend of economic progress.  However, later in the book it argues that increasing population caused a decline in the living standards of Japan and Denmark.  This decline supposedly occurred because the increasing population decreased the value of labor and therefore the market for specialization and inventions.  England escapes this fate because of coal and phantom land in the colonies.  This contradiction between the need for human density for specialization and economic progress and the idea that increased population density reduced the value of labor destroying the market for inventions is not adequately resolved.

The book argues, starting on page 52, that trade is what allowed homo sapiens to succeed where other apes failed and even other humans failed such as Neanderthals.  It provides numerous examples of how various groups of humans regressed technologically because of inadequate population densities to support specialization, such as Tanzania.  The book summarizes the lessons by quoting economist Julian Simon “population leading to diminishing returns is fiction: the induced increase in productivity is scientific fact.”  P. 83.

In a chapter entitled “Escaping Malthus Trap,” Ridley discusses how Japan after a period of prosperity gives up its technology.  He states “that sometime between 1700 and 1800, the Japanese collectively gave up the plough in favour of the hoe because people were cheaper to hire than draught animals.”  P. 198.  The reason for this according to Ridley was rapid population expansion due to paddy rice technology.  This population boom made labor cheap and killed the market for technology.  Denmark follows the same path as Japan and by the 1800s becomes “trapped by its own self sufficiency.”  P. 200.  Britain escapes the Malthusian trap that Japan, Denmark, and Ireland suffer, according to Ridely, because of selective breeding (maybe p. 200), ghost acres provided by the colonies (p. 202), release valve emigration to the colonies (p. 202), and coal (sustained industrial revolution p. 216.)

There is a logical inconsistency between the conclusion early in the book that population density is necessary for prosperity, but later in the book arguing that prosperity stalled after a burst in population in various countries.  The explanation of selective breeding, does not explain why the US or Australia prospered.  These countries were heavily populated by British rejects.  Similarly, the ghost acres provided by the colonies were eventually used up.  It might be argued that there was some tipping point that could only be achieved with ghost acres.  I think this fails also, because it flies in the face of the book’s earlier argument that increased population densities allow more specialization and invention to increase everyone’s standard of living.  The release valve emigration fails for the same reasons as the ghost acres.  The emergence of coal is also unsatisfying.  Coal mining was known before the birth of Christ and trade in coal occurred in England as far back as the 1300s, according to Wikipedia.  The book also argues that many surges of economic growth were extinguished by parasitic political systems.  However, it never states this is why Japan’s and Denmark’s prosperity was reversed.

What was new in the industrial revolution was not coal, but the machines to use coal and numerous other inventions.  The book argues that these inventions were not in general due to new scientific discoveries, p. 255, and I agree.  So why at this particular point in time did we have a sudden increase in rate of technological advance, including machines that used coal?  The beginning of the industrial revolution coincides with the recognition of property right’s in inventions.  The US constitution states (Article 1, section 1, clause 8) that inventors have ‘RIGHTS” in their inventions.  Patents, which are legal title to an invention, are the only free market system for encouraging people to invent.  While Britain had a patent system at least back to the Statute of Monopolies, 1623, it did not recognize a right to property in one’s invention.  It was a royal grant, subject to the whims of the ruling monarch.  As a result, it was expensive and arbitrary.  However, when the United States recognizes that inventors have a property right to their invention, this provides a whole new incentive to inventors and their financial backers.  No doubt this attitude towards inventions also infected Britain.  For more on the correlation between real per capita increases in income and patent systems see Source of Economic Growth.

Mr. Ridley argues that patents at best have marginal effect on the rate of invention.  However, Mr. Ridley shows an appalling lack of knowledge about patents and intellectual property.  He also has a number of inconsistent statements about intellectual property.  For instance, on page 267, he states that copyrights have little effect on the creativity of musical composers.  However, on page 326 he states that Nashville was saved by music entrepreneurs using good local copyrights in the 1930s.  Not only are these two statements contradictory, there is no such thing as local copyrights in the United States.


The book has numerous other errors about intellectual property.  For instance, it states that intellectual property is not like other property, because it is useless if you keep it to yourself, p. 262.  This statement is nonsense.  The Coca Cola formula is not shared and this is the only reason it has any value.  A patent to an invention (legal title to an invention) only has value if there is some ability to exclude others from using it – as opposed to knowing about it.  If everyone can make a laser without pay royalties, then it may have value to the world but it has no differential value to the inventor.  Patents are derived from exactly the same philosophical basis as real property.  Namely,  Locke’s theory of Natural Rights.  For more information see Scarcity – Does it Prove Intellectual Property is Unjustified? Below are a list of some, but not all, of the book’s errors related to patents:

1) The book then states that people get rich by selling each other things and services not ideas, p. 263.  What are authors, professors, engineers, scientists, really selling?  Authors are not selling books, they are selling ideas that just happen to be embodied in books.  The Kindle proves this.  The Kindle does not allow the user to buy a book, but to buy the ideas in a book.  Professors are either selling the teaching of ideas or just an expensive way to bore students.  Engineers are selling a service, which encompasses ideas not the paper (digital ones and zeros) on which it is written.  Most companies do not make money manufacturing things, they make money with inventions (ideas) that are implemented in things.  When a company only sells things with no (new) ideas in these things, then their profit margins are extremely narrow.  One of the limitations on growth has been this Luddite refusal to allow inventors to specialize in inventing.  This book’s premise is built on the division of labor, but the author rejects this idea when it comes to inventing.

2) Mr. Ridley also seems to be confused between the spread of information related to inventions and the legal right to use that information to build an invention.  It is a major goal of modern patent systems to spread information about inventions so that they can be used by other people to build other inventions.  In the U.S. we built patent depository libraries to spread the wealth of information in patents (before the internet).  Patents encourage people to share the information associated with their inventions instead of keeping them a trade secret.  Countries without patent systems tend to invent mainly things that can be protected with a trade secret.  (See Switzerland before they adopt a patent system)  As a result, other inventors do not get learn from these inventions and the rate of technological progress is inhibited.

3) The book perpetuates the first mover advantage alternative to patents.  Xerox had the world’s greatest first mover advantage in plain paper copiers, when it agreed to settle an antitrust lawsuit in 1975 by giving away its patent portfolio.  Its market share went from almost 100% in plain paper copiers to 14% in just four years.  The first mover advantage is a fairy tale.

4) The book argues, p. 264, that there is no evidence that patents are what drive inventors to invent.  This statement is completely illogical.  Real property rights are not what drive farmers to farm or builders to build houses.  Nevertheless, there would be a lot less building and less efficient farming, if we did not have real property rights.  Just look at countries, where property rights in buildings and land are hard to impossible to obtain.

5) The book states that a number of inventions were never patented, p. 264, such as automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers.  While it is possible that the first version of some of these inventions were not patented, all of these inventions were subject to numerous patents.  This can be easily verified with a simple patent search.  For instance, there are at least 20 patents and probably hundreds of patents on automatic transmissions.  The same is true of ballpoint pens, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers.  A simple internet search shows that chemist Leo Hendrik Baekeland (1863-1944) invented and first patented the synthetic resin that we know as Bakelite in 1907.[1] Jacques E Brandenberger was granted patents to cover the machinery and the essential ideas of his manufacturing process of the new film (cellophane).[2] The assertions of no patents for the zipper is also easily shown to be incorrect.  Elias Howe, who invented the sewing machine received a patent in 1851 for an ‘Automatic, Continuous Clothing Closure’ (zipper).[3]

6) The book argues that the Wright brothers, enforcing their patent on airplane control surfaces, supposedly shut down the airplane industry in the US.  This is the typical propaganda of open source community.  First of all the Wright brothers were building airplanes, so the industry was not shut down by enforcement of the patents.  Second stealing other people’s property is not shutting down industry, it is shutting down theft.  We would not say that someone stopped the harvest of wheat, because they did not let someone else reap the wheat they planted on their land.

7) The patent thicket argument is repeated by Mr. Ridley to suggest that patents inhibit advances in technology.  A number of papers[4] have shown that there is no empirical evidence for the patent thicket argument and that the logical analogies on which it is based are flawed.  For more information see  Intellectual Property Socialism: Part IV USPTO Takes Aim at Inventors.

8) Mr. Ridley further demonstrates his ignorance of patents by repeating the concern that the US Patent Office was issuing patents for human genes in the 1990s, p. 265.  What the Patent Office did and does was issue patents on “isolated genes.”  This is similar to patents on things like isolated forms of vitamin B12, which was patented.  For more information see Gene Patenting Debate Continues.

9) The book also mistakenly calls a patent a “temporary monopoly.”  A patent is a property right, just like property rights in land, houses, cars, etc.  The logical basis for patents is exactly the same as other property rights.  Property rights are based on Natural Rights, which states that since you own yourself you own the product of your labor (physical and mental).  For more information see The Myth that Patents are Monopolies.

10) He also implies that patents are top down solution to encouraging invention.  Nothing could be further from the truth.  All a patent system does is provide property rights to inventors for their inventions.  This is similar to property rights for land, which is a bottom up way to increase the productivity of farming for instance.  Just giving pseudo property rights to peasants in the USSR and China caused enormous increases in farm production.  Property rights are a bottom up solution, not a top down solution.  In fact, the genius of the United States patent system (as opposed to Britain’s) is that it was accessible to all people, including women and slaves that had no property rights under their state laws.  This encouraged a torrent of inventive activity in the U.S. that propelled it from a backward farming country to an economic and technological powerhouse in the world in less than 60 years.  For more information see the excellent book by B. Zorina Kahn, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920.

Open Source

I am convinced that Mr. Ridley’s poor research on patents and intellectual property is due to his infatuation with the open source movement.  On page 356 he opines that genetic research will soon go open source.  He is so excited about open source that he eventually suggests a Marxist’s open source utopia – “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356

The open source movement has been a dismal failure.  Its biggest success has been to extend UNIX (LINUX) to personal computers, other platforms, and add new features.  Open source has mainly extended existing technologies, much like the incremental invention that can be expected from large companies.  The open source movement deludes itself into believing they are fighting some sort of David versus Goliath battle against large corporations and the patent system.  The reality is that open source developers are giving large corporations, such as IBM, their efforts for free and weakening the bargaining power of technical personnel.  The open source movement plays right into the hands of large corporations and other large institutions, by weakening the property rights of developers in their work.  It should be no surprise that open source has been an abysmal failure, since this exactly the situation most of the world lived under until 1800.  Before modern patent systems, new inventions were rare and the return for the invention was often controlled by a trade guild.  The members of the trade guild profited equally, meaning there was little incentive for the inventor to spend time creating.  Per capita income of the world before 1800 had been stagnant for millennia.  Where modern patent laws were adopted around 1800, incredible increases in per capita income occurred.  Mr. Ridley trumpets this progress throughout his book.  In areas without patent systems, we see stagnant growth in per capita income.  For instance, Japan’s per capita income does not take off until they copy the US patent system in the 1860s.

It is unfortunate that this excellent book is disfigured by the author’s irrational infatuation with the open source movement.  This infatuation causes the author to embrace the logical contradiction that increases in population density increase economic growth and also causes the Malthusian trap (decreases in economic growth).  It also causes him to reject the solution to the Malthusian trap, which is the recognition of property rights in inventions.

[1] 7/21/10

[2] 7/12/10


[4] Ted Buckley, Ph.D., The Myth of the Anticommons, Bio, (2007); Epstien, Richard A., Kuhlik, Bruce N., Is there a Biomedical Anticommons, Regulation, (Summer 2004), pp. 54-58

July 22, 2010 - Posted by | -Economics, -History, -Philosophy, Innovation, Patents | , , , , , , , ,


  1. Mostly this is good, however, claiming that growth in Japan from the 1860s was a result of liberalizing patents is a big stretch to anyone who knows Japanese history. Japanese society was reorganized in the Meiji Revolution of the 1860s on a scale not often seen in human history. Before this time most of the populace was in near-slavery.

    Patent liberalization was such a small part of the changes in the Japanese economy in the Meiji era that attributing this to a few patents is ridiculous. Rather, most of the innovations that Japan introduced in this era had been known long before in other areas of the world. Japan finally escaped from a growth-killing anti-western technology regime that shut out anything western good or bad. The end to the deliberate suppression of widely known innovations lead to a flood of growth. None of this knowledge was new at all, and none of it was developed in Japan- you might even say it was “open source”. I would have to call this a counter-example to your conclusion- and not a supporting example.

    Comment by Dan | July 22, 2010 | Reply

  2. As a student of Japanese history then you are aware that Japan considered the US patent system the reason for America’s incredible economic and technological success.

    How come Holland did not take off and Britain did? Both were western. Europe had private property, rule of law, and sound banking systems long before it took off economically (per capita income increases). It did not take off until modern patent systems were introduced.

    While it is true that technologically backwards countries can start to catch up with modern countries just by copying their technology in theory – no patent system needed. This rarely happens in practice. Partly, because technological progress requires respect for property rights and patents are property rights. As a result, it is unusual for a country to strengthen their property rights without also strengthening their intellectual property rights.

    Comment by dbhalling | July 22, 2010 | Reply

  3. I can agree with all of your points here regarding the need for a patent system etc. But these benefits do not change the fact that the suddenness of Japan’s early success was largely driven by a flood of existing knowledge, much more than new Japanese inventions.

    Either way, all of this pales in comparison to the economic effects of allowing people to walk off of their farms and go to work where real demand existed, for example. “For instance, Japan’s per capita income does not take off until they copy the US patent system in the 1860s” is a fantastic oversimplification, when the incredible volume of changes that Japan faced in this era are considered. I could make the exact same statement about hundreds of other changes in this era, and if I did not at least mention that there was a complete political revolution going on, I might even be accused of being deceptive. Without some more context this statement is at best careless.

    Comment by Dan | July 22, 2010 | Reply

  4. I think that I made it clear that patents are part of private property rights. You will find that countries with weak or non-existent patent are almost always poor and technologically backward. The main exception to this being very small countries (small markets). Theoretically it should be possible for a backward country to just absorb other people’s technology (no patent system) and grow economical, but there is no empirical evidence for this.

    Comment by dbhalling | July 22, 2010 | Reply

    • Over the long term I would agree with all of that. In particular, the Japanese economy today is certainly driven by patents on an incredible scale. This was a complicated evolution however, and to single out patent liberalization as the significant factor behind Japanese growth from 1860 remains an exaggeration. Japan just had so much catching up to do based on prior art, that new innovation must have been a lagging factor. An accurate statement would be “Patent liberalization was also a major factor in sustaining the growth brought about by the Japanese economic reforms of the 1860s”

      It would actually be quite interesting to see some empirical research on which early Japanese patents had a major economic impact, and pinpoint an actual “Golden Age” era where native Japanese innovation started to really drive significant growth. 1880s? 1912?

      Comment by Dan | July 23, 2010 | Reply

  5. Dan, I think you are underestimating a couple of things. First, the patent system encouraged inventions that were adaptations to the local conditions in Japan. Second, you overestimate the value of “big” inventions and underestimate the value of little inventions. Most inventions are not considered important to academics, but help improve the lives of ordinary people and increase the efficiency of production. Third, the patent system encouraged foreign investment.

    Certainly, a patent system without other property rights would be a failure. Similarly, an overbearing bureaucracy or tax system would stifle the economy with or without a strong patent system. But I think you are underestimating the importance of a patent system to economic growth, even in a technologically backward country. As Mark Twain said “a country without a patent office and good patent laws was just a crab, and couldn’t travel any way but sideways or backways.”

    Comment by dbhalling | July 23, 2010 | Reply

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