When Patents Democratized the World of Technological Innovation

During the 19th century, the United States became the most technologically and economically innovative country in the world thanks to the patent system, which protected the property rights of ideas.

This, in turn, allowed people starting from an unfavourable economic and social situation, using exclusively the power of their good ideas, to climb in an unprecedented way in the history of humanity.

Climbing socially
As Daron Acemoglu and James A. Robinson explain in their book Why Countries Fail: The Origins of Power, Prosperity and Poverty:

Between 1820 and 1845, only 19 percent of U.S. patent holders had parents who were professionals or from large, known landowning families. During the same period, 40 percent of patent holders had only primary education or less.

Ideas, good ideas, simply competed in a level playing field. Or at least a much greater level playing field. Even if you were poor, if you had a good idea, you could get a patent on it, a procedure that was not too expensive.

Later, that idea could be sold to another person or company that paid with it, which allowed you to earn money and prestige. Thomas Edison, for example, invented the phonograph and light bulb extraordinarily well, and registered 1,093 patents in his name in the United States and 1,500 worldwide.

But if you had few ideas or just one, then the best way to make money was to start a business. That, in turn, required capital. But the patent system was joined by another flattering circumstance in such a context: the banks were willing to lend you the money, because there was a rapid expansion of banking and financial intermediation.

“While in 1818 there were 338 banks in operation in the United States, with total assets of 160 million dollars, in 1914 there were already 27,864 banks, with total assets valued at 27,300 million dollars. Potential inventors had easy access to capital to set up their businesses. In addition, intense competition between banks and financial institutions made capital available at fairly low interest rates.

Thus, while economic institutions are critical in establishing whether a country is poor or prosperous, it is politics and political institutions that determine the country’s economic institutions.