Why was Schumpeter not more concerned with patents? Rémy Guichardaz, Julien Pénin To cite this version: Rémy Guichardaz, Julien Pénin. Why was Schumpeter not more concerned with patents?. Journal of Evolutionary Economics, Springer Verlag (Germany), 2019, 29 (4), pp.1361-1369. 10.1007/s00191- 019-00643-w. hal-02437831 HAL Id: hal-02437831 https://hal.archives-ouvertes.fr/hal-02437831 Submitted on 13 Jan 2020 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Why was Schumpeter not more concerned with patents? Corresponding author: Guichardaz Rémy [email protected] Co-author: Pénin Julien [email protected] Université de Strasbourg, Université de Lorraine, CNRS, BETA, F-67000 Strasbourg, France Abstract Although Schumpeter is widely acknowledged as a pioneer of the economic analysis of innovation and although the patent system occupies an important place today in this field of research, Schumpeter did not see patents as playing a key role for fostering innovation. He mentioned them only a couple of times, in passing, and never developed any scientific analysis of the patent system. In this paper, we propose an explanation of this blind spot based on three characteristics of Schumpeter’s thought: First, entrepreneurs are largely motivated by non- monetary elements; second, they enjoy a first-mover advantage because imitation is difficult; third, Schumpeter viewed the innovation process as a relentless race in which firms are doomed to innovate in order to avoid disappearing. The Schumpeterian view of the economic process therefore largely reduces the economic importance of patents. Keywords: Patents; Schumpeter; innovation; incentives; creative destruction. JEL codes: B25, B53, O31 Acknowledgements: We thank Professor Mark S. Knell for his useful suggestions and remarks during the EMAEE 2017 conference. 1 1. Introduction Schumpeter’s entire body of work examines the dynamics of capitalism; an analysis relying crucially on the central concept of innovation: As Baumol (2002) put it, for Schumpeter capitalism is nothing but an “innovation machine”. However, despite the importance he granted to innovation, imitation, entrepreneurship, etc., in 45 years of publications Schumpeter very rarely spoke about the patent system. And when he did, it is mainly in chapter VIII of Capitalism, Socialism and Democracy (1942) that discusses “Monopolistic Practices”, a topic that is broader than the role of patents. The objective of this paper is thus to understand why was Schumpeter not more concerned with the patent system1. In the only paper that examines this question to our knowledge, Blaug (2005) argued that the reason for his neglect lies in the fact that the concept of intellectual property rights (IPR) only emerged in the 1970s. Therefore, Blaug claimed, Schumpeter could not study IPR because in order to analyze a concept one first needs to name it. Blaug concludes: “it was the rise of property rights economics in the 1970s, and especially the 1980s, that tied together the old labels of patents, copyrights and trademarks in one label of IPR, giving rise to our question that would simply have made no sense to anyone writing in 1942” (Blaug, 2005, p. 72). Yet, this explanation, while valid for the general concept of IPR, does not apply to patents. Indeed, patents had been the topic of major controversies in the nineteenth century. Many authors had questioned their utility2. Holland even decided to refuse to grant patents until the First World War. Schumpeter, who was passionate about history and innovation, must have been aware of these debates. This is all the more likely considering Fritz Machlup, who was one of his good friends, published a paper about these controversies at the end of Schumpeter’s life (Machlup and Penrose, 1950). Furthermore, as Blaug notes, “Edward Chamberlin, teaching at the same university as Schumpeter (Harvard), included a section on patents and trade-marks in Chapter 4 of his Theory of Monopolistic Competition (1933)” (Blaug, 2005, p. 71). While 1 The minor role given to patents is all the more puzzling as Schumpeter did place market power at the heart of the innovation dynamics (Gilbert, 2006). In line with the tradition of the classical economists, Schumpeter, for a long time, used the concept of free competition rather than the marginalist concept of perfect competition. In a famous citation he claimed that: “perfect competition is not only impossible but inferior and has no title to being set up as a model of ideal efficiency” (1942, p. 106). 2 As Blaug (2005) mentions, Bentham, Adam Smith, McCulloch, John Stuart Mill and later Sidgwick and Pigou in Britain and Jean-Baptiste Say, Bastiat, Dupuit and Walras in France all participated in this debate. 2 this is not evidence that Schumpeter was interested by these questions, it clearly shows that they were discussed in his time. In this paper, we argue that, although Schumpeter was aware of patents and accepted their existence, his vision of economic dynamics led him to place patents only at the margin of the innovation process. Indeed, Schumpeter’s view of innovation is very different from the Arrow (1962) model, which has influenced most of the economics of innovation in the last decades, and which reduces innovation to a public good dilemma, thus placing incentives and patents at the heart of the innovation process. In Schumpeter’s view, firms embark in an innovation race. Innovation is a matter of life and death, meaning that firms have to innovate even if patent protection is not available. The main character of the innovation epic, the entrepreneur, is largely intrinsically motivated and does not need to be incentivized by the existence of patents. Furthermore, Schumpeter does not see the innovation process as an easily replicable information production process. He clearly considers that imitation takes time and is costly. We argue that these differences explain why patents play a marginal role in order to incentivize firms to innovate in the Schumpeterian framework and why, while Schumpeter does mention patents a few times, he puts them at the backseat and not at the forefront of the innovation process3. In the next section, we consider whether Schumpeter was a patent abolitionist (section 2). Then we analyze the place of patents in Schumpeter’s thought first by looking at the entrepreneur and its motivations (section 3) and second by presenting Schumpeter’s dynamic view of the innovation process (section 4). Section 5 concludes. 2. Was Schumpeter a patent abolitionist? Before going further, it is important to address an initial question: Since Schumpeter only incidentally refers to patents, does it mean that he was a patent abolitionist, i.e. that he believed that patents are welfare decreasing and should be banished? Clearly, this was not the case. Whenever Schumpeter mentioned patents, he never questioned their existence. For instance, 3 It is interesting to mention that incentives in general were not a central economic concern for Schumpeter. As Laffont and Martimort noted (2002, p. 11): “It is surprising to observe that Schumpeter (1954) does not mention the word of incentives in his monumental history of economic thought. How is it possible when today, for many economists, economics is to a large extent a matter of incentives”. We interpret this as evidence that the issue of incentives emerged in economics mostly in the 1970s and 1980s, with the rise of the economics of information. 3 Capitalism, Socialism and Democracy makes only rare references to patents (the word “patents” appears less than ten times in the book), but those are quite explicit: “Hence it becomes necessary to resort to such protecting devices as patents or temporary secrecy of processes […] That does not affect the proposition that the protection afforded by patents and so on is, in the condition of a profit economy, on balance a propelling and not an inhibiting factor” (Schumpeter, 1942, p. 88). This point is consolidated in a paper published by Schumpeter in 1947, which is often considered as one of the best syntheses of his thought (Antonelli, 2015). That paper contains a section where Schumpeter analyses how innovations generate benefits not only for innovators but also for the economy as a whole since “fruits of the progress involved are handed to consumers and work-men” (Schumpeter, 1947, p. 155). He then notes that the “practice of innovators striving to keep their returns alive by means of patents and in other ways” (p. 155) can slow down this process of diffusion of the benefits of innovation within the economy. However, overall, he concludes (in footnote 13) that this is a necessary evil because “the knowledge that such measures are available may be necessary in order to induce anyone to embark upon certain ventures” (p. 155). These elements could be sufficient to dismiss the hypothesis of Schumpeter as a patent abolitionist. He believed that patents are necessary in order to provide incentives for innovation and to promote economic development. The views of the people who knew him provide additional evidence: for example, his friend Machlup (McCraw, 2007) categorized him squarely as a proponent of patents4. However, while Schumpeter was clearly in favor of patents, two remarks can be added. First, Schumpeter sees patents are part of a broader range of monopolistic practices, i.e. in the absence of patents, innovative firms can rely on other strategies in order to secure monopoly power.