Books Reviewed by John Smith
Lamoreaux, Naomi R. and Kenneth l. Sokoloff, eds. Financing Innovation in the United States, 1870 to the Present. Cambridge: MIT Press, 2007. Pp. xiii + 503. Hardcover, $47.00.
This book is a collection of essays presented at a conference sponsored by the Social Sciences Research Council in 2003. The question underlying the conference was why the United States has been so consistently technologically innovative over the past two centuries. This question breaks down into two parts: why were Americans so inventive, that is technologically creative, and why were Americans so effective at converting inventions into innovations? The case studies in the book attempt to answer the latter question, although the essay nicely summarizes the work of Sokoloff on the role of the patent system in encouraging inventive activity. The case studies fit rather well into the more general pattern of the historical evolution of America’s innovation system.
In the early nineteenth century, inventors usually had to become entrepreneurs, obtaining capital from relatives, friends, and acquaintances. After the 1836 reform of the patent law, inventors increasingly saw patents as marketable commodities, and professional inventing blossomed. Inventors no longer had to be entrepreneurs, although many continued to be. Patent rights could be bartered for capital to start up enterprises. As the relatively simple mechanical technologies of the first Industrial Revolution gave way to the more complex and expensive ones of the Second Industrial Revolution, the modern corporation became the major institution generating technological innovations—though not necessarily the inventions it commercialized.
From the late nineteenth to the mid-twentieth century, the corporate R&D laboratory was synonymous with new technologies. Until the 1920s, firms usually financed innovation with their own resources, such as retained earnings, rather than raise money in financial markets. This began to change in that roaring decade, as public enthusiasm for new technologies, notably radio and airplanes, led investors to buy stock in companies making innovative products. However, the big action on Wall Street in that decade was in financing electrical utilities, as exemplified by the careers of tycoons Samuel Insull and Alfred Loomis. World War II witnessed a torrent of innovation, demonstrating the power of government funding and unleashing the electronic genie. The ensuing Cold War and electronics revolutions led to a new innovative regime that once again included entrepreneurial startups, now financed by the new institution of venture capital.
If nothing else, technologically driven capitalism in America has been a dynamic enterprise over the past two centuries, and these case studies further document the flexibility and ongoing adaptability of entrepreneurs to new challenges and opportunities.
Dept. of History