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Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

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The New Renaissance Hat
Louis Rouanet
April 17, 2015
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Michel Chevalier (1806–1879) was a very influential French economist during the second half of the nineteenth century. He is still widely known in France for being the architect of the Cobden-Chevalier Treaty of 1860 which was the free-trade agreement between France and Great Britain. Michel Chevalier is, however, less known for his major contribution to the intellectual property debate. [1] Contrary to Jean Baptiste Say, Gustave de Molinari, and many other French economists, Chevalier fiercely opposed the patent system. As Fritz Machlup remarked: “Among French economists, Michel Chevalier was probably the most emphatic in the joint antagonism to tariffs and patents, declaring that both ‘stem from the same doctrine and result in the same abuses.’”

Taking a fresh look at Michel Chevalier’s major work, Les Brevets d’invention (1878), we find it to be not only a well-written and powerful book, but also has remained impressively relevant. The arguments advanced by Chevalier anticipate the current arguments of the present opponents of intellectual property.

Patents as Contrary to Freedom and Economic Progress

Michel Chevalier argues that patents cannot be justified if they are contrary to freedom, even if beneficial to technological change. For him “From the moment we can make effective the patent only through inquisitorial expedients, violence, and subversion of liberty of labor, it is proof that we must renounce patents.” Chevalier rejects utilitarianism as a sufficient method to justify or refute the patent system. Chevalier’s opposition to patents, however, is not just based on moral arguments but shows the disastrous effects of this system for both foreign trade and the economy in general.

According to Chevalier, patents are of the same nature as privileges and monopolies which were prevalent during the Ancien Régime. They are also comparable in their effects to protectionist policies:

In absolute terms, patents diminish the productive power of nations that recognize them: evident proposition for those who believe that freedom, free competition, is the great lever of industrial progress.

Chevalier goes on to note the conservative and anti-innovation nature of monopolies and gives many examples of monopolies during the Ancien Régime. According to him, the innovators during the Ancien Régime weren’t rewarded, not because of the absence of patents, but because of the corporation guild system which was destroying competition and freedom to entry into markets. Thus, the innovators were constantly sued by guilds and consumers rarely benefited from their inventions. This argument is still relevant today. Indeed, companies protected from competition and government-owned corporations are often less innovative and more subject to conservative measures. Sectors typically run by government such as schools experience very little technological progress. On the other hand, the competitive process of the market gives incentives for the actors to differentiate from the other producers. As Pascal Salin stated, the company which makes the highest profits on a free market is the company which is the best positioned to “invent the future.” The essential virtue of competition is that it encourages producers to innovate in order to better serve the needs of consumers.

As one of his more striking examples, Chevalier examines the case of aniline — a dye and major innovation in the chemical industry — and shows how monopoly, resulting from patents, leads to hampered innovation. His interpretation of the problems caused by patents in the chemical industry at the time is consistent with more recent studies done by Boldrin and Levine in Against Intellectual Monopoly, now the seminal work on the topic.

Innovation as a Process

Chevalier understood that innovation is, above all, a process and that giving privileges to the innovator will destroy this process, leading to less and not more inventions. He wrote:

Every industrial discovery is the product of the general ferment of ideas, the result of an internal work which was accomplished with the support of a large number of successive or simultaneous collaborators in society, often for centuries.

This argument regarding the cumulative nature of innovation is still the most powerful argument against intellectual monopoly today and has also been the theme of several recent studies.2 Similar to Chevalier, Hayek saw innovation as a process and stated that “it is not obvious that such forced scarcity [intellectual property] is the most effective way to stimulate the human creative process.”

In an 1862 debate in the Académe des Sciences Morales et Politiques, Chevalier gave the example of Louis Daguerre, one of the inventors of photography, who didn’t seek a patent for his system of photography. According to Chevalier, the absence of a patent led to necessary improvements of the daguerreotype and fostered its widespread use. His conclusion is the following:

The spirit of man proceeds only by successive trials and repeated attempts. Discoveries do not arrive with a single bound to the degree of perfection or completion, which is reserved for them; there must be renewed, persevering efforts, cut by breaks that allow, so to speak, to breath. … If it is true that the invention must pass through the hands of twenty people before reaching its final state, it follows that the exclusive privilege granted to the first patented, and to each of his followers, prevents this practical result rather than facilitate it.

The Increasing Number of Patents and Negative Consequences

Already during the nineteenth century, legal instability and uncertainty challenged the actual efficiency of the patent system and the economists were very much aware of this problem. Chevalier warned that the patent system would lead to legal uncertainty for the companies and would lead the industry back to a guild system where no entrepreneur would dare to enter a market for fear of being sued by patent holders. Chevalier was ahead of his time by denouncing what can be considered the ancestors of today’s patent trolls.

Chevalier concluded his 1862 article by stating: “I think I have said enough to show that the patent legislation has been an eccentricity of the legislator.” He went further in 1863 and added that “[a]ll friends of industrial and social progress must work together to rescue the industry of obstacles, obsolete remains of the past. Patents must disappear first.” [3]

1. Fritz Machlup and Edith Penrose briefly discussed Michel Chevalier in “The Patent Controversy in the Nineteenth Century,” Journal of Economic History, 1950.

2. See Alberto Galasso et Mark Schankerman, “Patents and Cumulative Innovation: Causal Evidence from the Courts”, NBER working paper, 21 June 2014 ; and also, Alessandro Nuvolari, “Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine,” Cambridge Journal of Economics 28, No. 3 (2004).

3. Quoted in Eugène Pouillet, “Traité théorique et pratique des brevets d’invention et de la contrefaçon,” 1909, pp. x–xi.

Louis Rouanet is a student at Sciences Po Paris (Institute of Political Studies) where he studies economics and political science.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

A Portrait of the Classical Gold Standard – Article by Marcia Christoff-Kurapovna

A Portrait of the Classical Gold Standard – Article by Marcia Christoff-Kurapovna

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The New Renaissance Hat
Marcia Christoff-Kurapovna
April 15, 2015
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“The world that disappeared in 1914 appeared, in retrospect, something like our picture of Paradise,” wrote the economist Cecil Hirsch in his June 1934 review of R.W. Hawtrey’s classic, The Art of Central Banking (1933). Hirsch bemoaned the loss of the far-sighted restraint that had once prevailed among the “bankers’ banks” of the West, concluding that modern times “had failed to attain the standard of wisdom and foresight that prevailed in the 19th century.”That wisdom and foresight was once upon a time institutionalized throughout an international monetary culture — gold-based, wary of credit, and contemptuous of debt, public or private. This world included central banks including the Bank of England, the Bank of France, the Swiss National Bank, the early Federal Reserve, the Imperial Bank of Austria-Hungary, and the German Reichsbank. But the entrenched hard-money ideology of the time restrained all of them. The Bank of Russia, for example, which once required 50 percent to 100 percent gold backing of all notes issued, possessed the second largest gold reserves on the planet at the turn of the twentieth century.

“The countries that were tied together in the gold standard system represented to a not inconsiderable degree a community of interest in and responsibility for the maintenance of economic and financial stability throughout the world,” recounted Aldoph C. Miller, member of the Federal Reserve Board from 1914 to 1936, in The Proceedings of the Academy of Political Science, in May 1936. “The gold standard was the one outstanding symbol of unity and economic solidarity which the nineteenth century world had developed.”

It was a time when “automatic market forces,” as economists of the day referred to them, prevailed over monetary management. Redeemability of money in (fine) gold ensured, within limits, stability in foreign exchange rates. Credit was extended only as far as reserve ratios would allow, and central banks were required to keep fixed reserves of gold against notes-in-circulation and against demand deposits.

When Markets Dominated Monetary “Policy”

Gold flows regulated international price relationships through markets, which adjusted themselves accordingly: prices rose when there was an influx of gold — for example, when one country received a debt payment from another country (always in gold), or during such times as the California or Australian gold rushes of the 1870s. These inflows meant credit expansion and a rise in prices. An outflow of gold meant credit was contracted and price deflation followed.

The efficiency of that standard was not impeded by the major central banks in such a way that “any disturbance of economic or financial character originating at any point in the world which might threaten the continued maintenance of economic equilibrium was quickly detected by foreign exchanges,” Miller, the Federal Reserve board member, noted in his paper. “In this way, the gold standard system became in a very real sense a regime or rule of economic health, a method of catching economic disturbances in the bud.”

The Bank of England, the grand master of them all, was the financial center of the universe, whose tight handle on its credit policies was so disciplined that the secured the top spot while not even holding the largest gold reserves. Consistent in its belief that protection of reserves was the chief, and only important, criterion of credit policy, England became the leading exporter of capital, the free market for gold, the international discount market, and international banker for the trade of other countries, as well as her own. The world was in this sense on the sterling standard.

The Bank of France, wisely admonished by its founder, Napoleon, to make sure France was always a creditor country, was so replete with reserves it made England a 500 million franc loan (in 1915 numbers) at the onset of the World War I. Switzerland, perhaps the last “19th-century-style” hold-out today with unlimited-liability private bankers and strict debt-ceiling legislation, also required high standards of its National Bank, founded in 1907. By the 1930s that country had higher banking reserves than the US; the Swiss franc was never explicitly devalued, unlike nearly every other Western nation’s currency, and the country’s domestic price level remained the most stable in the world.

For a time, the disciplined mindset of these banks found its way across the Atlantic, where the idea of a central bank had been long the subject of hot debate in the US. The economist H. Parker Willis, writing about the controversy in The Journal of the Proceedings of the Academy of Political Science, October 1913, admonished: “The Federal Reserve banks are to be ‘bankers’ banks,’ and they are intended to do for the banker what he himself does for the public.”

At first, the advice was heeded: in September 1916, almost two years after its founding on December 23,1913, the fledgling Fed worked out an amendment to its gold policy on the basis of a very conservative view of credit. This new policy sought to restrain “the undue and unnecessary expansion of credit,” wrote Fed board member Miller, in an article for The American Economic Review, in June 1921.

The Bank of Russia, during the second half of the nineteenth century steered itself through the Crimean War, the Russo-Turkish War, the Russo-Japanese War, impending Balkan wars — not to mention all that was to follow — and managed to emerge with sound fiscal policies and massive gold reserves. According to The Economist of May 20, 1899, Russian holdings were 95 million pounds sterling of gold, while the Bank of France held 78 million sterling worth. (Austria-Hungary held 30 million sterling worth of gold and the Bank of England 30 million sterling worth of both gold and silver.) “Russia up to the very moment of rupture [with Japan, 1904–1905], was working imperturbably at the progressive consolidation of her finances,” reported Karl Helfferich of the University of Berlin, at a meeting of The Royal Economic Society [UK] in December 1904. “Even in years of industrial crises and defective harvest, her foreign trade showed an excess of exports over imports more than sufficient to compensate payments sent abroad. And, as guarantee her monetary system she has succeeded in a amassing and maintaining a vast reserve of gold.”

These banks, in turn, drew on the medieval/Renaissance and Baroque-era banking traditions of the Hanseatic League, the Bank of Venice, and Amsterdam banks. Payment-on-demand “in good and heavy gold” was like a blood-oath binding the banker-client relationship. The transfer of credit “did not arise from any such substitution of credit for money,” noted Charles F. Dunbar, in The Quarterly Journal of Economics of April 1892, “but from the simple fact that the transfer in-bank saved the necessity of counting coin and manual delivery of every transaction.”

Bankers were forbidden to deal in certain commodities, could not make loans or create credit for the purchase of such commodities, and forbade both foreigners and citizens from buying silver on credit unless the same amount in cash was in the bank. According to Dunbar, a Venetian law of 1403 on reserve requirements became the basis of US banking law on the deposits of public securities in the late 1800s.

After the fall of bi-metallism in the 1870s, gold continued to perform monetary functions among the main countries of the Western world (and the well-administered Bank of Japan). It was the only medium of exchange and the only currency with unrestricted legal tender. It became the vaunted “measure of value.” Bank currency notes were simply used as auxiliary to gold and, in general, did not enjoy the privilege of legal tender.

The End of An Era

It was certainly not a flawless system, or without periodic crises. But central banks had to act in an exceptionally prudent manner given the all-over public distrust of paper money.

As economist Andrew Jay Frame of the University of Chicago, writing in The Journal of Political Economy, in January 1912, noted: “During panics in Britain in 1847 and 1866, when cash payments were suspended, the floodgates of cash were opened [by The Bank of England], the governor sent word to the street that solvent banks would be accommodated, and the panic was relieved.” Frame then adds: “However, this extra cash and the increased loans that went with it were very quickly put to an end to avoid credit expansion.”

The US was equally confident of its prudent attitude. Aldoph Miller, writing of Federal Reserve policy, remarked: “The three chief elements of the policy of a central bank or system of reserve holding institutions are best disclosed in connection with the attitude towards 1) gold 2) currency 3) credit.” He noted proudly: “The federal reserve system has met [these] tests on the whole with remarkable success.”

But after World War I, a different international landscape was left behind. England had been displaced as the center of international finance; the US and France emerged as the chief post-war creditor countries. The mechanism of the gold standard to which depreciated currencies could be related no longer existed. Only the US was left with a full gold standard. England and France had a gold bullion standard and other countries (Germany, primarily) had a gold-exchange standard.

A matrix of unbalanced trade relationships began to saturate the international economy. Then, with so many foreign countries attendant upon its speculative boom, the US manipulated its own domestic credit policies to ease credit and exchange-standard controls. This eventually culminated in an international financial crisis of 1931. Under Bretton Woods (1944), the gold standard was effectively abandoned: domestic convertibility was illegal and the role of gold was very constrained in favor of the dollar.

“It was, at least in theory, simple enough in the old days,” wrote a wistful W. Randolph Burgess, head of the New York Federal Reserve, in 1938. “In the present strange new world, where the old gold portents have lost their former meaning, where is the radio beam which the central banker may follow? What is the equivalent of gold?”

The men of his era and of the late nineteenth century understood the meaning of such a question and, more importantly, why it is one that must be asked. But theirs was a different world, indeed — one without “QE,” ZIRP,” or “Unknown Knowns” as fiscal policy. And there were no helicopters, either.

Marcia Christoff-Kurapovna is at work on the biography of a prominent European head of state and businessman.  Her work has appeared in such publications as The Wall Street Journal, The Economist and Foreign Affairs.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Review of Gary Wolfram’s “A Capitalist Manifesto” – Article by G. Stolyarov II

Review of Gary Wolfram’s “A Capitalist Manifesto” – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
January 5, 2013
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While Dr. Gary Wolfram’s A Capitalist Manifesto is more an introduction to economics and economic history than a manifesto, it communicates economic concepts in a clear and entertaining manner and does so from a market-friendly point of view. Wolfram’s strengths as an educator stand out in this book, which could serve as an excellent text for teaching basic microeconomics and political economy to all audiences. Wolfram is a professor of economics at Hillsdale College, whose course in public-choice economics I attended. The book’s narration greatly resembles my experience of Wolfram’s classroom teaching, which focuses on the essence of an idea and its real-world relevance and applications, often utilizing entertaining concrete examples.

The book begins with several chapters on introductory microeconomics – marginal analysis, supply, demand, market equilibrium, opportunity cost, and the effects of policies that artificially prevent markets from clearing. The middle of the book focuses on economic history and political economy – commenting on the development of Western markets from the autarkic, manorial system of the feudal Middle Ages, through the rise of commerce during the Early Modern period, the Industrial Revolution, the emergence of corporations, and the rise in the 20th century of economic regimentation by national governments. One of the strengths of this book is its treatment of the benefits of free trade, from its role in progress throughout history to the theoretical groundwork of Ricardian comparative advantage. Enlightening discussions of constitutionalism and the classical idea of negative liberty are also provided. Wolfram introduces the insights of Ludwig von Mises regarding the infeasibility of central planning in solving the problem of economic calculation, as well as Friedrich Hayek’s famous “knowledge problem” – the dispersion of information among all the individuals in an economy and the impossibility of a central planner assembling all the information needed to make appropriate decisions. Wolfram further articulates the key insights of Frederic Bastiat: the seen versus the unseen in economic policy, the perils of coercive redistribution of wealth, the immorality of using the law to commit acts which would have been unacceptable if done by private individuals acting alone, and the perverse incentives created by a system where the government is able to dispense special privileges to a select few.

The latter third of the book focuses on such areas as money, inflation, and macroeconomics – including an exposition of the Keynesian model and its assumptions. Wolfram is able to explain Keynesian economics in a more coherent and understandable manner than most Keynesians; he thoroughly understands the theories he critiques, and he presents them with fairness and objectivity. I do, however, wish that the book had delved more thoroughly into a critique of Keynesianism. The discussion therein of the Keynesian model’s questionable assumptions is a good start, and perhaps a gateway to more comprehensive critiques, such as those of Murray Rothbard and Robert Murphy. A layperson reading A Capitalist Manifesto would be able to come out with a fundamental understanding of Keynes’s central idea and its assumptions – but he would not, solely as a result of this book, necessarily be able to refute the arguments of Keynes’s contemporary followers, such as Joseph Stiglitz and Paul Krugman. Wolfram mentions critiques of Keynesianism by Milton Friedman and the monetarist school, the concept of rational expectations precipitating a move away from Keynesianism in the late 1970s, and the “supply-side” interpretations of the Keynesian model from the 1980s. However, those viewpoints are not discussed in the same level of detail as the basic Keynesian model.

More generally, my only significant critique of A Capitalist Manifesto is that it is too brief in certain respects. It offers promising introductions to a variety of economic ideas, but leaves some significant questions arising from those areas unanswered. Wolfram introduces the history and function of the corporation but does not discuss the principal-agent problem in large, publicly traded firms with highly dispersed ownership. To anticipate and answer (and perhaps partially acknowledge the validity of) criticisms of the contemporary corporate form of organization, commentary on how this problem might be overcome is essential. Wolfram explains the components and computation of Gross Domestic Product and the Consumer Price Index but devotes only a small discussion to critiques of these measures – critiques that are particularly relevant in an electronic age, when an increasing proportion of valuable content – from art to music to writing to games – is delivered online at no monetary cost to the final consumer. How can economic output and inflation be measured and meaningfully interpreted in an economy characterized partially by traditional money-for-goods/services transactions and partially by the “free” content model that is funded through external sources (e.g., donations or the creators’ independent income and wealth)? Moreover, does Wolfram’s statement that the absence of profit (sufficient to cover the opportunity cost) would result in the eventual decline of an enterprise need to be qualified to account for new models of delivering content? For instance, if an individual or firm uses one income stream to support a different activity that is not itself revenue- or profit-generating, there is a possibility for this arrangement to be sustainable in the long term if it is also justified by perceived non-monetary value.

Wolfram’s discussion of inflation is correct and forms a strong link between inflation and the quantity of money (government-issued fiat money these days) – but I would have wished to see a more thorough focus on Ludwig von Mises’s insight that new money does not enter the economy to equally raise everybody’s incomes simultaneously; rather, the distortion due to inflation comes precisely from the fact that some (the politically favored) receive the new money and can benefit from using it while prices have not yet fully adjusted. (This can be logically inferred from Wolfram’s discussion of some of the “tools” of the Federal Reserve, which directly affect the incomes of politically connected banks – but I wish the connection to Mises’s insight had been made more explicit.) Wolfram does mention that inflation can be a convenient tool for national governments to reduce their debt burdens, and he also discusses the inflationary role of fractional-reserve banking and “tools” available to central banks such as the Federal Reserve. However, Wolfram’s proposed solutions to the problems of inflation remain unclear from the text. Does he support Milton Friedman’s proposal for a fixed rate of growth in the fiat-money supply, or does he advocate a return to a classical gold standard – or perhaps to a system of market-originated competing currencies, as proposed by Hayek? It would also have been interesting to read Wolfram’s thoughts on the prospects and viability of peer-to-peer and digital currencies, such as Bitcoin, and whether these could mitigate some of the deleterious effects of central-bank-generated inflation.

Wolfram does discuss in some detail the sometimes non-meritocratic outcomes of markets – stating, for instance, that “boxers may make millions of dollars while poets make very little.” Indeed, it is possible to produce far more extreme comparisons of this sort – e.g., a popular “star” with no talent or sense earning millions of dollars for recording-studio-hackneyed “music” while genuinely talented classical musicians and composers might earn relatively little, or even have their own work remain a personal hobby pursued for enjoyment alone. To some critics of markets, this may well be the reason to oppose them and seek some manner of non-market compensation for people of merit. For a defender of the unhampered market economy, a crucial endeavor should be to demonstrate that truly free markets (unlike the heavily politicized markets of our time) can tend toward meritocracy in the long run, or at least offer people of merit a much greater range of possibilities for success than exists under any other system. Another possible avenue of exploration might be the manner in which a highly regimented political system (especially in the areas of education) might result in a “dumbed-down” culture which neglects and sometimes outright opposes intellectual and esthetic sophistication and the ethic of personal productivity which is indispensable to a culture that prizes merit. Furthermore, defenders of markets should continually seek out ways to make the existing society more meritocratic, even in the face of systemic distortions of outcomes. Technology and competition – both of which Wolfram correctly praises – should be utilized by liberty-friendly entrepreneurs to provide more opportunities for talented individuals to demonstrate their value and be rewarded thereby.

Wolfram’s engaging style and many valid and enlightening insights led me to desire more along the same lines from him. Perhaps A Capitalist Manifesto will inspire other readers to ask similar questions and seek more market-friendly answers. Wolfram provides a glossary of common economic terms and famous historical figures, as well as some helpful references to economic classics within the endnotes of each chapter.  A Capitalist Manifesto will have its most powerful impact if readers see it as the beginning of their intellectual journey and utilize the gateways it offers to other writings in economics and political economy.

Disclosure: I received a free copy of the book for the purposes of creating a review.