Decline of the Independent Inventor: A Schumpterian Story?

Lamoreaux and Sokoloff study the prediction by the economist Joseph Schumpeter that the rise of large firms would squash the independent inventor-entrepreneur. Schumpeter’s work written on the eve of World War II, Capitalism, Socialism, and Democracy, provides a pessimistic outlook that the large firm would manage their inventors and stifle their creativity. In The Decline of the Independent Inventor: A Schumpterian Story? , the authors agree that the independent inventor was largely replaced by the large firm, but that the great inventor still has the ability to maintain independence by establishing a firm him or herself. This independence was especially prevalent in the Midwest where more venture capital was available. Essentially, the increasing sophistication and additional start-up capital required for inventors meant that the large firm is the solution.

The implication of Schumpeter’s work is that because the inventor-entrepreneur was the main political supporter for “private property and free contracting,” their eclipse by the large firm would lead to a socialist revolution. He wrote during a time when the socialists and capitalist systems were competing. While this idea is interesting, the authors add little to this idea. Perhaps history made the question irrelevant.

For an individual to have an incentive to invent there must be some guarantee that his idea cannot be stolen. Invention requires a cost today. If someone else can capture the profit tomorrow, inventors will not be successful. In 1836, the United States enacted a series of patent laws which paved the way for career inventors. These laws protected intellectual property, which encouraged invention, and promoted the sharing of technological knowledge, which improved the efficiency of inventors. In the early years of patent laws, patents were easy to obtain and were generally given at a local level. Therefore, a patent in Cleveland probably did not mean much in New York City. This discrepancy posed little problem because the invention in Cleveland may only stay in Cleveland and the inventor in Cleveland probably lacked the resources to ship the inventions to New York City at a competitive price.

The transcontinental railroad in 1869 lessened the problem of geographic isolation and increased the probability of having the idea stolen elsewhere. The government implemented a national patent system shortly after, and the inventor-entrepreneur gained the ability to become enormously wealthy. Inventors made money by manufacturing their inventions and then shipping and selling them, or selling off the property rights to someone else at a different location. As the ability to profit from invention rose, so did the number of inventors. Also, inventors, eager to profit, invented more. In the early 1800s, less than five percent of inventors had more than 10 patents. In 1890 it rose to 35.9%, and it rose again to 62.4 percent by 1910.

Not surprisingly, inventors of this period proved to be creative and mobile in their entrepreneurial role. Entrepreneurs are thought to be geographically mobile in order to take advantage of better opportunities. The authors find that inventors were twice more likely to relocate to a different state than the average population. This movement illustrates that inventors were also entrepreneurs—where one invents is irrelevant but where one markets an invention is crucial. Inventors embraced their entrepreneurial role and were willing to move.

During this period of 1870 to 1920, we see the largest number of entrepreneurially-oriented inventors. The barriers to entry were low (other than talent). The patent system and favorable legal institutions protected intellectual property at a modest cost. However, in the early 1900s, the barriers to entry began to rise because formal education in the sciences became more important. Ten percent of patents awarded to those born between 1820 and 1845 went to individuals with college or graduate training. Between 1865 and 1885, this number rose to 80%.

The careers of the inventors also began to change. They became less mobile, more educated, and more attached to one firm. The firm became crucial to the careers of all but the most successful inventors. The most successful ones were able to begin corporations by themselves. Essentially, the authors find that more capital was needed for invention, and this extra money raised the barrier of entry. The way for inventors to have support therefore, was to distinguish themselves through higher education and use this to find a job with a large firm. The large firm had the resources they needed. This idea still wins out today.

The large scale firm became the market solution for several reasons. First, it lessens the problem of information exchange. The problems of asymmetric information place severe limits on the exchange of technological ideas in the market. In order for a firm to be willing to buy an idea, it must know what it is. However, an inventor is unwilling to tell his entire idea because he or she is afraid that at least part of it will be stolen. This reluctance creates hold-up costs. In the firm, the hold-up costs are eliminated because the employees are not selling individual ideas to the firm—they are salaried employees. Also, as the sophistication of invention increased, more capital was needed. Only extremely distinguished individuals and large firms had access to the nation’s capital markets. Therefore, the large firm became a necessity.

Lamoreaux and Sokoloff agree with Schumpeter that survival for the independent inventor/entrepreneur became more difficult with the rise of the large firm. They find that firms were able to tie up inventors because inventors could not acquire the capital they needed for innovation themselves. A reduction in the number individuals and the number of different firms in which they patent highlight this drop in mobility for inventors. The career patterns of specialized inventors also shifted: even the most productive inventors were obtaining on average few patents earlier in their careers than they were later on, after they had formed attachments to companies.

The large firms, who had the capabilities for the necessary R&D, were centered in the Mid-Atlantic States. Inventors and researchers moved to this area to find jobs in these firms. Inventors gained the advantage of these resources at large forms, but they lost their independence too. Schumpeter feared that this loss of would stifle creativity.

The authors find Schumpeter’s fear of creativity to be extreme. They believe that the most talented and proven individuals had the ability to find capital and research what they wanted. They say that this capital was especially available in the Midwest. Cleveland was known for having its pools of venture capital and this attracted many inventors. Nonetheless, these great inventors had to prove themselves in order to attract capital, and this provided a hurdle to success. This hurdle explains the decline in patent rates that occurred in the twentieth century. However, the “B” patentees as they call them, the slightly less successful inventors, found it harder to succeed independently and were much more likely to work for the R&D of a firm. They might have lost some freedom because of this transition, but the loss does not improve to be nearly as important as Schumpeter feared. Essentially, the market for inventions became more competitive, and this meant that many independent researchers were squeezed out of the market by the more efficient large firm. These researchers found jobs at the large firms. .