1. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Brief History of Institutions from Innovation and Incentives, ch 1 What is required to support innovative activities? (1) the will, including a good idea (2) the means Incentives must provide the means. Research, like art, needs concentrated resources. Resources can be concentrated in several ways, but the most important ones are (1) taxation (2) by appropriating the benefits (3) private wealth (from saving or investing)

2. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Correspondingly, the institutions that support innovation are governments, firms (IP), and private patrons or foundations. This history points to two types of invention: (1) institutions, (2) innovations themselves. Subsistence conservatism: arises from the inability to concentrate resources or appropriate benefits. For example, why did it take so long to invent the water wheel, wind mill, harness? Societies had to invent institutions before innovations.

3. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Egyptians and Greeks invented institutions as well as technologies and science. Pharaohs employed engineers In Greek city-states, kings employed inventors to improve war machines (Archimedes). Greek scholars organized schools and charged tuition. Greeks built the Library at Alexandria in Egypt to fund scholarship.

4. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Romans: Did not improve on institutions, but improved greatly on technologies, such as aquaducts and water mills. Invented cement. Government funding plus occasional sui generis rewards. (Funding through taxation.) Dark ages: Monasteries became centers of learning. (Funding through concentrated wealth.) Middle ages: Creativity exploded. Universities invented around 1200. Guilds, with market power. They might theoretically have appropriated benefits of innovation. Instead they became a conservative force against upstart innovators, and eventually vanished. Age of monarchies: Monarchs became patrons.

5. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Prizes: An enduring incentive, especially between Middle Ages and now but still not dead. The French: Napoleon: food preservation, Lyon Intellectual Property: came from “patents,” or open letters granting monopoly privilege. “Patents” were transformed into our modern institution. Statute of Monopolies 1623 to limit “patents” (anticipated in Venice 1400s) Statute of Anne 1710 (enacted to replace the exclusive right to print which was held by the Stationers’ Guild, under license from the Crown). Why was there suddenly a need to protect against copying?

6. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 19th Century: Invention exploded, largely driven by the lure of patents. 19th Century: A lot of sui generis funding by governments, some for commercial gain, but it was not institutionalized. Wave tank experiments in Britain Experiments with telegraph Laying the transatlantic telegraph cable Babbage and his Difference Engine 19th Century: Private concentrations of wealth looking for something to be spent on. Philanthropic foundations become the main source of R&D funding for awhile. Invented peer-review.

7. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 WWI and (especially) WWII changed the research climate. Until WWII, foundations were the big funders of university R&D. Afterwards, the feds. radar, airplanes, atomic energy The Military-Industrial Complex: After WWII the federal government became the main patron of R&D. In the 1950’s, about 2/3 of total U.S. R&D was paid for by the federal government, and much of it was “given” to firms. DOD, DOE, contract research NIH and NSF, peer-review of proposals Sputnik (1959): reinvigorated federal spending

8. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Development of the Late 20th century: Hybridization of public and private research. Should publicly funded research outputs be patented? This is not entirely a late-20th century phenomenon. Universities had long patented discoveries funded with non-government money. Consistent with the policy of granting copyrights to university authors. Bayh-Dole Act: patents can issue on federally funded research outputs, and grantee owns the patents. Does this make sense?

9. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 A useful “fact” about growth Suppose that rT=.7 (and r is “small”) At growth rate r, it takes T years to double because e 0.7 =2 (approximately). ($1) e rT = ($2) ($1) (1+r) T = ($2) From Easterlin (1996) growth rates 1950-90 developed countries 3%, less developed countries 2% How much difference does this make? rT=.7.03 x T D =.7.02 x T LD =.7 T D /T LD =2/3 After 200 years, the LDC is 100 years behind.