Historical examples disprove the success of prize/buyout schemes and support patents potential for innovation

Historical evidence presents a valuable opportunity for exploring key features of this debate. The framers of U.S. policies were aware of the options that had prevailed in the colonial period and in Europe, but explicitly rejected the use of “premiums” or prizes in favor of property rights in patents. The patent system was market-oriented, offered open access to creative individuals regardless of their social status and background, enabled strong enforcement of such rights, ensured useful disclosure, and promoted extensive markets for technology. The empirical evidence on the early patent system in the United States suggests that patents and their effective legal enforcement played a substantial role in influencing the rate and direction of inventive activity in a country that would become the world’s leading industrial nation. Patent institutions were not perfect, but as Demsetz points out, their imperfections did not necessarily imply the superiority of any other system.86 Perhaps the most telling evidence comprises the endogenous diffusion and adoption of the distinctive U.S. rules and standards towards property rights in patents by other countries who wished to emulate its industrial achievements. In contrast, the majority of organizations that had specialized in granting prizes for industrial innovations ultimately became disillusioned with this policy, and the practice of bestowing technology awards declined among both private and public institutions. As observers noted in the nineteenth century, industrial prizes faltered in part because of their lack of market orientation, and even the democratic nature of economic institutions in the United States could not overcome such drawbacks in administered prize systems.87 Judges had to combine technical and industry-specific knowledge with impartiality, but even the most competent personnel could not ensure consistency; decision making among panels was complicated by differences in standards, interpretation, capture, and risk aversion. Such difficulties tended to lead to haphazard decisions or were often overcome by simply giving the award to the person or firm with the most established reputation. Juries were not immune to the effects of outright bias, capture, cognitive dissonance, lobbying, and “marketing.” Prizes tended to offer private benefits to both the proposer and the winner, largely because they served as valuable advertisements, with few geographical spillovers. Winners of such awards were generally unrepresentative of the most significant innovations, in part because the market value of useful inventions would typically be far greater than any prize that could be offered by private or state initiative. Even prestigious, well-meaning, and amply funded institutions such as the RSA failed to develop truly valuable inventions. A systematic assessment of the role of incentives for innovation in the nineteenth century therefore highlights the advantages of market-oriented policies that economize on information, especially in the decentralized determination of price, value, and “winners.” Market mechanisms also bypassed many of the high transactions costs attendant on negotiating, monitoring, and contracting with applicants and winners. This is not to say that administered inducements are never effective, especially in the context of such market failure as occurs in the provision of tropical medicines or vaccines, where significant gaps might exist between private and social returns. However, in distinguishing between the numerous ingenious theoretical prize mechanisms that have been proposed, such transactions costs need to be recognized and incorporated. In particular, governance issues and the potential for rent seeking and corruption should be explicitly addressed, especially in countries where complementary institutions and political control mechanisms are weak or nonexistent. For, the historical record indicates that the evolution of the institution of innovation prizes over the past three centuries serves as a cautionary tale rather than as a success story.