We would like to express our appreciation to our research assistants Marigee Bacolod, Young-Nahn Baek, Dalit Baranoff, Lisa Boehmer, Nancy Cole, Yael Elad, Svjetlana Gacinovic, Brian Houghton, Anna Maria Lagiss, Huagang Li, Catherine Truong Ly, Homan Dayani, Gina Franco, Charles Kaljian, David Madero Suarez, John Majewski, Yolanda McDonough Summerhill, Brian Rivera, Ludmila Skulkina, Dhanoos Sutthiphisal, Matthew Wiswall, and Tamara Zavaliyenko. We are also indebted to Zorina Khan for her collaboration with us in collecting the great inventor data sets and for her invaluable advice, as well as to Marjorie Ciarlante and Carolyn Cooper for their help in accessing the records of the Patent Office at the National Archives. We have also benefited from discussions with Robert Allen, Ashish Arora, Sally Clarke, Iain Cockburn, Wes Cohen, Paul David, Stanley Engerman, Joseph Ferrie, Catherine Fisk, Avner Greif, Louis Galambos, Timothy Guinnane, Stephen Haber, Rebecca Henderson, David Hounshell, Thomas P. Hughes, Adam Jaffe, Margaret Jacob, Margaret Levenstein, Josh Lerner, Joel Mokyr, Ariel Pakes, Daniel Raff, Jean-Laurent Rosenthal, Bhaven Sampat, Suzanne Scotchmer, John Kenly Smith, Jr., Scott Stern, William Summerhill, Peter Temin, Ross Thomson, Manuel Trajtenberg, Steven Usselman, Michael Waldman, John Wallis, Norton Wise, Gavin Wright, Mary Yeager, and participants in seminar presentations at the Washington Area Seminar in Economic History, Harvard University, Northwestern University, Oxford University, Stanford University, and Yale University, at meetings of the Economic History Association and the NBER’s Entrepreneurship Group, and, of course, at the Loufest Conference. We gratefully acknowledge the financial support we have received for this research from the National Science Foundation, as well as from All Souls College at Oxford University, the Russell Sage Foundation, the Social Science Research Council, and the Collins Endowment and the Academic Senate at the University of California, Los Angeles.
The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function. The true pacemakers of socialism were not the intellectuals or agitators who preached it but the Vanderbilts, Carnegies and Rockefellers.
For Joseph Schumpeter, the heart of the capitalist system was the entrepreneur—an extraordinary individual who had the foresight to see profit in new products or production processes as well as the tenacity to overcome any obstacles that stood in the way. Schumpeter believed that the rise of large firms in the early twentieth century was making the entrepreneur obsolete. By investing in in-house R&D laboratories staffed by teams of engineers and scientists, large firms had routinized the process of innovation, “depersonalized and autonomatized” technological change, so that the incremental advances were realized “as a matter of course.” In such an environment not only did “personality and will power,” and thus the entrepreneur, “count for less,” but the greater efficiency of large-scale enterprises was undermining the small- and medium-size firms that historically had been the spawning ground for heroic innovators with radically new ideas about how to do things. These developments, Schumpeter foretold, would have profound consequences for the entire society. Because entrepreneurs were the primary political supports for “private property and free contracting,” their eclipse would pave the way for socialist revolution.2
From the standpoint of the early twenty-first century, it may be difficult to take this vision of the decline of capitalism seriously. On the eve of World War II, however, when Schumpeter was writing Capitalism, Socialism and Democracy, it seemed much more compelling—both on logical and empirical grounds. During the 1920s, many privately held firms in new-technology industries had taken advantage of the boom in stock-market prices to go public, increasing their scale and adding new layers of professional management to their company hierarchies. This era, in which the roles of financiers (and the managers who served their interests) appeared to have been elevated above those who created new technologies, gave way to a deep and prolonged depression that weighed heavily on the populations of capitalist countries. Gloom about the future was pervasive, and rival systems, such as Communism in the Soviet Union, attracted growing numbers of adherents throughout the West.
During the post-World War II period, the technological prowess exhibited by General Electric, IBM, and other giant corporations spurred widespread acceptance of Schumpeter’s belief that large firms were undermining the basis for individual entrepreneurship. Indeed, despite mounting evidence that large firms were losing their edge, the idea that technological discovery was most effectively pursued inside large integrated enterprises became, if anything, more dominant in the scholarship during the 1980s, when the so-called “new economics of information” supplied an alternative theoretical rationale. According to this theory, problems of asymmetric information place severe limits on the exchange of technological ideas in the market. Before firms will invest in a technology, they need to be able to assess its value—to estimate, for example, the extent to which a new process will lower production costs, or whether a novel product will likely appeal to consumers. But because inventors (or other sellers of new technology) fear that firms will steal their ideas, they typically will not be willing to provide potential purchasers with enough information to effectuate sales. Moving the process of technological discovery within the firm not only overcomes this source of market failure, but also, it is argued, yields other informational advantages. For example, firms with R&D labs will be in a better position to exploit ideas for innovation that arise from the actual experience of producing or marketing goods. This kind of knowledge is largely firm-specific and can be transmitted much more readily among personnel responsible for different functions within the organization than it can across organizational boundaries.3
Certainly, there is evidence that the dynamics of technological change shifted during the early twentieth century in ways that seem, at least on the surface, to fit Schumpeter’s analysis of the demise of the entrepreneur. As Figure 1 shows, patenting rates per capita increased dramatically across the nineteenth century, peaked around the turn of the century, and then began a long period of decline. In other words, patenting rates appear to have been inversely correlated with the growth of in-house R&D, dropping in the twentieth century as more and more firms created their own research laboratories.
Of course, we recognize that there are objections to using patents as a measure of entrepreneurial innovation. Schumpeter himself explicitly distinguished the concept of innovation from that of invention. What entrepreneurs did when they innovated, according to Schumpeter, was to take a new idea (an invention) and make it work—that is, embody the idea in a productive enterprise and generate profits. It was the latter achievement that was important to Schumpeter, not the discovery of the invention. We also recognize that patenting is an imperfect measure even of invention. Some valuable inventions are never patented, and many inventions are patented that have little or no economic significance.
Nonetheless, we contend that data on trends in patenting are useful for testing Schumpeter’s argument about the diminishing role of the entrepreneur in technological change and, more generally, in capitalism. The essence of a patent is the grant of an exclusive property right to a new technological idea. By making property out of intangible knowledge—property that could be exploited by the owner or sold or leased to someone else—the patent system created the foundation of property rights upon which entrepreneurial innovation flourished. As we will show, moreover, it was this foundation, and the flourishing market for patented technology it made possible, that created the conditions for the emergence of a class of talented, highly entrepreneurial inventors who specialized in the production for sale of new technological ideas.
Before plunging into this demonstration, it is useful to provide a brief description of our data. The starting point for our analysis is three random cross-sectional samples (totaling about 6,600 patents) that we drew from the Annual Reports of the Commissioner of Patents for the years 1870-71, 1890-91, and 1910-11. For each patent in the samples we recorded a brief description of the invention, the name and location of the patentee(s), and the names and locations of any assignees granted rights to the invention before the date the patent was issued. We also linked this data on patents to other information, such as characteristics of the firms to which the patentees assigned their patent rights. Our second major data set is longitudinal and was obtained by selecting from the three cross-sectional samples all (561) inventors whose last names began with the letter “B.” We then collected information from Patent Gazettes and from the Annual Reports of the Commissioner of Patents for all of the (6057) patents obtained by these patentees for the twenty-five years before and after they appeared in one of our samples, again linking this data to the same kinds of sources we used for the original cross-sections. For our third data set, we collected similar information for patents granted in selected years to “great inventors” born between 1820 and 1885. We defined great inventors as individuals whose technological discoveries were notable enough to earn them inclusion in the Dictionary of American Biography. In addition to specific information on a substantial subset of their patents, we collected biographical detail on these inventors from the dictionary entries, as well as the total number of patents each received over his or her career.4
In the analysis that follows we first describe the details of the patent system that were most important for supporting entrepreneurial innovation. After legislation in 1836 put the final elements of this system in place, both patenting and trade in patent rights boomed. The result, we show, was the emergence by the last third of the century of a broad group of specialized, highly productive, and highly entrepreneurial inventors. It was the thinning of the ranks of these independent inventors that accounts for much of the decline in patenting rates in the early twentieth century. The rest of this article is devoted to examining the changing career patterns of this extraordinary group of inventors in order to understand why their numbers were dwindling.