A compelling argument for the existence of intellectual property laws can be found in the example of the discovery and commercialisation of the steam engine in Great Britain during the Industrial Revolution.
In his 2010 book The Most Powerful Idea in the World: A Story of Steam, Industry and Invention*, U.S. author William Rosen illustrates how economic imperative in the age of steam drove the rise in patents issued in Britain.
The approach in Britain of using patents to encourage invention is in contrast to the contemporaneous approach in France, where inventors were awarded cash for their inventions: “Between 1740 and 1780, the French inclination to reward inventors not by enforcing a natural right but by the grant of pensions and prizes resulted in the award of nearly 7 million livres – approximately $US600 million today – to inventors of largely forgotten devices…”. (p. 268)
The lesson is that an intellectual property system, in this case patents, provides a bridge between:
an inventor’s need for research, development and commercialisation investment; and
an investor’s need for inventions in which to invest to capitalise on the foundation and security of a legal monopoly.
Rosen's argument is that this interdependence began to flourish due to the English patent system in the 18th century, which mandated disclosure over secrecy.
“Those nations that relied on secrecy rather than patent tended to specialize in the sort of inventions that cannot be easily reverse-engineered, such as chemicals or dyes [here Rosen refers to the example of Germany]. One consequence is that almost all mechanical inventions – particularly, all steam engine innovations – were produced in countries that enforced some sort of patent law, since one can scarcely sell a compound engine and simultaneously keep its workings secret.“
“Anything that improved mining was attractive to the innovators of eighteenth-century England. Three–quarters of the patents for invention granted prior to the Savery engine were, one way or the other, mining innovations...”. (p. 264)
Rosen’s example of the commercial arrangement between engineer and inventor, James Watt, and his second major investor, Matthew Boulton, highlights the pivotal role he says patents played in encouraging investment and entrepreneurship in Britain relative to other states of the time. As a simplification, British-like approaches to intellectual property law became internationally common only in the late 19th century.
Watt’s steam engine concepts (there were many) were improvements to known steam engine technology. Watt and Boulton thought the best path to reach a market with Watt's patented technology was to apply it to make England's coal mining sector more efficient.
As Watt’s investor, Matthew Boulton replaced John Roebuck, Watt's first investor, when Roebuck became bankrupt. Roebuck had spent 3,000 pounds on the invention. He estimated a further 10,000 pounds was needed. Boulton persuaded the other claimants against Roebuck to let Boulton take over 100% of the patent rights in return for 630 pounds and an agreement to drop Boulton's claims against any other part of the estate of Roebuck.
The security of ownership of patent rights, coupled with serving an existing coal mining industry need of pumping water out of mines, fuelled Boulton's entrepreneurship and financial model:
“Boulton determined that the most willing customers for the Watt invention were coal mines in Cornwall. One of those mines, the Great County Adit, alone had half of the most advanced steam engines in the world. Boulton developed an innovative business model: Boulton and Watt would take shares in Cornish mines in return for providing engines to drain them, negotiating royalties of one-third of the difference in cost between a Newcomen-type atmospheric engine and a Watt machine doing the same work.” (p. 170)
Boulton’s business model was future-focussed, realising rich rewards only after the invention was put to work**, in stark contrast with the French model of instant rewards for the existing invention with little incentive for further, future innovation, and use of the invention.
“The French Revolution and its consequences put France behind Britain for about 30 years. William Rosen quotes Jeff Horn, an authority in French invention, who has written: 'When the revolutionary and Napoleonic wars ended in 1815, the British were approximately a generation ahead in industrial technology and in the elaboration of the mechanized factory.' "
“A difference between Britain and France was Britain’s ability to turn inventors into national heroes.” (p. 269)
Rosen regards John Locke as an 18th century prophet for what came to titled "intellectual property" in the 19th century. His view is that as Locke's ideas took hold so did the increase in Britain's gross domestic product and the numbers of patents:
"...[F]rom 1700 to 1740, fewer than five patents were issued in Britain annually; from 1740 to 1780, the annual number had quadrupled, to nearly nineteen, and from 1780 to 1800, it was up to fifty-two." (p. 184)
* William Rosen, The Most Powerful Idea in the World: A story of Steam, Industry and Invention (Random House, NY, 2010).
** See Intellectual Property is not a Thing and Commercialisation defined