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May 8, 2008

What Adam Smith Taught

Abraham Lincoln's lecture on discoveries and inventions reveals a deep understanding of the patent system. It is amazing how his lecture, which is now well over 150 years old, can seem so fresh today.  He and Charlie Munger have inspired me to undertake a historical review of other important lessons of the imminent dead.  Today the lesson is from Scottish enlightenment thinker Adam Smith, famous for his authorship of The Wealth of Nations.

Consider the following excerpt from his treatise:

To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business . . . nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.

Adam Smith goes on and on from here about the many benefits of the "division of labour."  Although controversial in his day, the benefits of "the division of labour" are in our day a fact so well-accepted by the majority that many people seem unaware of the history of this idea.  We seem to assume it a logical consequence of any business. That it is not.  In each case in which a division of labor is successfully implemented in business, there was first an entrepreneur who saw the benefit of separating one task into two.  Henry Ford brought the magic of divisions of labor to the production of cars through the assembly line.   Most people can't imagine this, but before him others probably scoffed at the idea that something as complex as a car could ever be assembled without a single person overseeing the entire process.

Are we not still scoffers?  In the United States, we now live in an age in which most lawyers, business people, and researchers believe that R&D and early-stage product development are incapable of being done by two teams.  The fact remains, however, that the best inventors and the best startup CEOs are not often the same person.  And the best R&D and the best product development tend to occur in different environments.  We have strained for the past twenty-years in the United States to force inventors into the role of entrepreneurs, and entrepreneurs into the role of inventors.  Being a hardworking nation, we have not been entirely unsuccessful.  But how much more successful might we be were we to accept once and for all that there is an efficient division of labor between R&D and commercialization (yes, even the "commercialization" done by startups)?

The patent system is the most sophisticated and efficient means for implementing a division of labor between R&D and commercialization ever conceived by humans.  It is by cutting back at patent rights in the United States that we have inadvertently forced inventors to become entrepreneurs and entrepreneurs to become inventors.  Let us not further disintegrate the division of labor between R&D and commercialization by weakening our patent laws in 2008.  Let us recognize that good inventors and good startup CEOs are not always (or often!) the same person.  Let us "promote the progress of science and the useful arts" in the ways our Founding Fathers intended, by a division of labour between R&D and industry.

Posted by Michael Martin at May 8, 2008 9:09 AM | Patents In Business


let's be clear, I don't think anyone believes that there might should not be a seperation between RD and biz aspects of bringing an invention to production. It is only here in the last little while where we have seen the RD side decide that their contribution is much more valuable than what was actually contributed. Take NTP v RIM, the guy supposedly invented email over a wireless device. Even if we consider that to be non-obvious it is clear that he did not beat the next guy to "invent" it by very much, his "contribution" consisted of expediting the "invention" of wireless device email by a few months. Yay. So now that's worth 100's of millions because a best selling device happens to include that feature amongst many? Hardly.

Damage provisions plz.

Posted by: e6k at May 25, 2008 3:44 PM

So your explanation for why so much R&D is being done abroad now is that American inventors are asking too much for the work they do?

I disagree. What entrepreneurs and business people do is probably more valuable, and deserves to be rewarded more highly financially.

But as Abe Lincoln and Adam Smith understood, nobody is going to sit around pondering how to solve technical problems unless they get paid more than they would to do something else.

Inventors are usually quite resourceful. The opportunity costs of their time are not zero. The ones that truly want to be rich will become entrepreneurs.

But we would do better as a nation if we were more willing to share a bit of the wealth with the rest of the inventors, the ones who are perfectly happy to hand their ideas over to somebody else to commercialize -- provided they get a reasonable price for their time.

It's attitudes like yours that are driving Ph.D.s abroad.

Posted by: Michael F. Martin at May 25, 2008 8:37 PM

“The granting [of] patents ‘inflames cupidity’, excites fraud, stimulates men to run after schemes that may enable them to levy a tax on the public, begets disputes and quarrels betwixt inventors, provokes endless lawsuits...The principle of the law from which such consequences flow cannot be just.”


Adam smith was mostly anti patent.

Posted by: Someone at April 16, 2010 8:08 PM

sorry, that quote didn't come from adam smith. My mistake.

Posted by: Someone at April 16, 2010 8:42 PM