![28 Nathan Rosenberg and Scott Stern
group of scholars, and focused those scholars on identifying a systematic
research program to evaluate (a) the nature of innovation as an economic
good, (b) the organization of research and development organizations, and
(c) the interrelationship between innovation and the dynamics of industry
structure. The volume initiated a systematic research program that offered
a timely counterpoint to the macroeconomic approach that equated tech-
nological change to “the residual” and treated innovation as exogenous to
the economic system. The 1962 volume served a decisive role in establishing
the microeconomics of innovation and technological change.
To understand this contribution, it is worthwhile to take a brief but infor-
mative review of where the field stood in the late 1950s and how it had come
to that place. Kuznets (working in large part through the NBER) began, first
in the 1930s and then after the war, to systematically undertake a research
program focusing on the measurement of economic inputs and outputs with
the objective of relating them in some fashion. While measurement had
always been a part of economic science, the efforts spearheaded by Kuznets
and others involved a very significant increase in the sophistication and
comprehensiveness of measurement. Indeed, it is no surprise that the first
chapter of the 1962 volume is by Kuznets and is entitled “Inventive Activity:
Problems of Definition and Measurement.” It is also unsurprising that the
commentary is by Jacob Schmookler.
Most importantly, this measurement work demonstrated that the rela-
tionship between measured economic inputs (capital and labor) and outputs
(gross domestic product [GDP]) was changing dramatically over time and
that there was no easy explanation for this. Simply put, the measurement
program spearheaded by Kuznets at the NBER illuminated the central eco-
nomic fact of US economic history.
Of course, the explanatory framework for understanding these empirical
findings only emerged in the mid-1950s with the seminal studies of Moses
Abramovitz ([1956], reprinted in 1990) and Bob Solow (1956, 1957). Both
Abramovitz and Solow highlighted that, over time, the amount of inputs
required to produce a given level of output had dramatically increased (an
upward shift in productivity of 2 percent per year). Simply put, they had
independently discovered—or more accurately, rediscovered—the residual
(Copeland 1937; Griliches 1996).
Of course, the interpretation of this increase in total factor productiv-
ity (TFP) was more controversial. In 1956, Solow introduced a simple and
tractable neoclassical equilibrium growth model. The Solow model simply
stated that the relationship between inputs and outputs at a point in time
can be described as the “level”of technology; as such, the changing relation-
ship between inputs and outputs can be described as “technical change.”
While Solow was of course aware and recognized that technical change may
itself be endogenous, the model took the growth rate in technology—A—to](https://image.slidesharecdn.com/25722566-250522132945-2a32e8fc/85/The-Rate-And-Direction-Of-Inventive-Activity-Revisited-Josh-Lerner-Editor-Scott-Stern-Editor-41-320.jpg)
![§ 2
England’s declaration of war did not make Peter Jameson “burn
to avenge gallant little Belgium,” or eager, in the phraseology of the
period, “to do his bit.” His commercial position was too damned
awkward for the indulgence of any such sentiments.
He left Wargrave at ten o’clock on the morning of August the
fifth; and reached the outskirts of London in forty-five minutes. Then
he gave the wheel to Murray, and began to think. Throughout, his
hand had been perfectly steady at the throttle, his foot firm on the
accelerator. Their speed had averaged forty miles an hour.
Behind him, in the tonneau, sat Francis Gordon, acting as always
on inspiration rather than reason, decision already reached. Francis
Gordon talked to himself, under his breath: first in Dutch and then in
German. He was testing, not his knowledge of those languages, but
his accent. “Ich kann es tun. Ich bin einer der einzigen die es tun
konnen,” he muttered. Then he began to recite, very slowly and
almost inaudibly, the first speech from Schiller’s Republican Tragedy:
Leonora. “Nichts mehr. Nichts mehr. Kein Wort mehr.
Es ist am Tag.”[1]
Peter was not talking to himself; had reached no decision. His
brain went over the salient facts of the situation; weighing them up.
Discarding details. Selecting essentials. The Jameson-Beckmann
problem must wait. How would Nirvana be affected? Home-trade, for
the moment at any rate, would collapse. The export-business might
hold up. Might. Probably wouldn’t. Remained the fact that if the
worst came to the worst he stood to loose seventeen thousand
pounds. . . . After all, people must smoke. Wars didn’t last for ever.
Could he see the thing through? Financially? . . .
“London & Joint Stock Bank, Pall Mall,” he said to the chauffeur.
They swirled through Piccadilly; nipped round past the Ritz;
slowed down St. James’ Street; and pulled up.](https://image.slidesharecdn.com/25722566-250522132945-2a32e8fc/85/The-Rate-And-Direction-Of-Inventive-Activity-Revisited-Josh-Lerner-Editor-Scott-Stern-Editor-62-320.jpg)
![me to impress on all our clients, that they do not anticipate any
financial crisis. Measures, as I am given to believe, have been taken;
temporary expedients adopted; by which. . . .” He went on to explain
them, at some length.
“Then I take it,” said Peter, “that on the resumption of banking-
business. . . .”
“Matters will be exactly as they were a week ago.” Mr. Davis rose
again, shook hands, made his point courteously. “Naturally, Mr.
Jameson, as Nirvana Limited will not be under the necessity of
making payments, they will not require any addition to the overdraft
which you have guaranteed for them.”
“Of course not,” said Peter. The interview had turned out
according to anticipation. If Nirvana wanted any more money, it
would have to be found in cash.
He stood for a moment on the steps of the Bank. London had not
altered in a night. The straight aristocratic thoroughfare seemed a
little busier than usual. That was all. Then he looked for the gaudy
sentries outside Marlborough House; saw that they were in khaki!
“The factory, please, Murray; and as fast as you can,” said our Mr.
Jameson. . . .
[1] “No more. No more. Not a word more. It is the
Day.”](https://image.slidesharecdn.com/25722566-250522132945-2a32e8fc/85/The-Rate-And-Direction-Of-Inventive-Activity-Revisited-Josh-Lerner-Editor-Scott-Stern-Editor-64-320.jpg)
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- 6. The Rate and Direction of Inventive Activity Revisited
- 7. A National Bureau of Economic Research Conference Report
- 8. The Rate and Direction of Inventive Activity Revisited Edited by Josh Lerner and Scott Stern The University of Chicago Press Chicago and London
- 9. Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, with a joint appointment in the Finance and the Entrepreneurial Management Units, and a research associate and codirector of the Productivity, Innovation, and Entrepreneurship Program at the National Bureau of Economic Research. Scott Stern is the School of Management Distinguished Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the Massachusetts Institute of Technology Sloan School of Management and a research associate and director of the Innovation Policy Working Group at the National Bureau of Economic Research. The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2012 by the National Bureau of Economic Research All rights reserved. Published 2012. Printed in the United States of America 21 20 19 18 17 16 15 14 13 12 1 2 3 4 5 ISBN-13: 978-0-226-47303-1 (cloth) ISBN-10: 0-226-47303-1 (cloth) Library of Congress Cataloging-in-Publication Data The rate and direction of inventive activity revisited / edited by Josh Lerner and Scott Stern. pages ; cm.—(National Bureau of Economic Research conference report) Includes bibliographical references and index. ISBN-13: 978-0-226-47303-1 (cloth : alkaline paper) ISBN-10: 0-226-47303-1 (cloth : alkaline paper) 1. Inventions— Congresses. 2. Technological innovations—Economic aspects— Congresses. 3. Discoveries in science—Congresses. 4. Academic- industrial collaboration—Congresses. I. Lerner, Joshua. II. Stern, Scott, 1969– III.Series: National Bureau of Economic Research conference report. HC79.T4R385 2012 338.′064—dc23 2011029618 o This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).
- 10. National Bureau of Economic Research Officers Kathleen B. Cooper, chairman Martin B. Zimmerman, vice-chairman James M. Poterba, president and chief executive officer Robert Mednick, treasurer Kelly Horak, controller and assistant corporate secretary Alterra Milone, corporate secretary Gerardine Johnson, assistant corporate secretary Directors at Large Peter C. Aldrich Elizabeth E. Bailey John H. Biggs John S. Clarkeson Don R. Conlan Kathleen B. Cooper Charles H. Dallara George C. Eads Jessica P. Einhorn Mohamed El-Erian Linda Ewing Jacob A. Frenkel Judith M. Gueron Robert S. Hamada Peter Blair Henry Karen N. Horn John Lipsky Laurence H. Meyer Michael H. Moskow Alicia H. Munnell Robert T. Parry James M. Poterba John S. Reed Marina v. N. Whitman Martin B. Zimmerman Directors by University Appointment George Akerlof, California, Berkeley Jagdish Bhagwati, Columbia Timothy Bresnahan, Stanford Alan V. Deardorff, Michigan Ray C. Fair, Yale Franklin Fisher, Massachusetts Institute of Technology John P. Gould, Chicago Mark Grinblatt, California, Los Angeles Bruce Hansen, Wisconsin–Madison Marjorie B. McElroy, Duke Joel Mokyr, Northwestern Andrew Postlewaite, Pennsylvania Uwe E. Reinhardt, Princeton Craig Swan, Minnesota David B. Yoffie, Harvard Directors by Appointment of Other Organizations Bart van Ark, The Conference Board Christopher Carroll, American Statistical Association Jean-Paul Chavas, Agricultural and Applied Economics Association Martin Gruber, American Finance Association Ellen L. Hughes-Cromwick, National Association for Business Economics Thea Lee, American Federation of Labor and Congress of Industrial Organizations William W. Lewis, Committee for Economic Development Robert Mednick, American Institute of Certified Public Accountants Alan L. Olmstead, Economic History Association John J. Siegfried, American Economic Association Gregor W. Smith, Canadian Economics Association Directors Emeriti Andrew Brimmer Glen G. Cain Carl F. Christ George Hatsopoulos Saul H. Hymans Lawrence R. Klein Paul W. McCracken Rudolph A. Oswald Peter G. Peterson Nathan Rosenberg
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- 12. Contents vii Introduction 1 Josh Lerner and Scott Stern I. Panel Discussion: The Impact of the 1962 RATE AND DIRECTION Volume, a Retrospective Why Was Rate and Direction So Important? 27 Nathan Rosenberg and Scott Stern Some Features of Research by Economists on Technological Change Foreshadowed by The Rate and Direction of Inventive Activity 35 Richard R. Nelson The Economics of Inventive Activity over Fifty Years 43 Kenneth J. Arrow II. The University-Industry Interface 1. Funding Scientific Knowledge: Selection, Disclosure, and the Public-Private Portfolio 51 Joshua S. Gans and Fiona Murray Comment: Suzanne Scotchmer
- 13. 2. The Diffusion of Scientific Knowledge across Time and Space: Evidence from Professional Transitions for the Superstars of Medicine 107 Pierre Azoulay, Joshua S. Graff Zivin, and Bhaven N. Sampat Comment: Adam B. Jaffe 3. The Effects of the Foreign Fulbright Program on Knowledge Creation in Science and Engineering 161 Shulamit Kahn and Megan MacGarvie Comment: Paula E. Stephan III. Market Structure and Innovation 4. Schumpeterian Competition and Diseconomies of Scope: Illustrations from the Histories of Microsoft and IBM 203 Timothy F. Bresnahan, Shane Greenstein, and Rebecca M. Henderson Comment: Giovanni Dosi 5. How Entrepreneurs Affect the Rate and Direction of Inventive Activity 277 Daniel F. Spulber Comment: Luis Cabral 6. Diversity and Technological Progress 319 Daron Acemoglu Comment: Samuel Kortum 7. Competition and Innovation: Did Arrow Hit the Bull’s Eye? 361 Carl Shapiro Comment: Michael D. Whinston IV. The Sources and Motivations of Innovators 8. Did Plant Patents Create the American Rose? 413 Petra Moser and Paul W. Rhode Comment: Jeffrey L. Furman 9. The Rate and Direction of Invention in the British Industrial Revolution: Incentives and Institutions 443 Ralf R. Meisenzahl and Joel Mokyr Comment: David C. Mowery viii Contents
- 14. Contents ix 10. The Confederacy of Heterogeneous Software Organizations and Heterogeneous Developers: Field Experimental Evidence on Sorting and Worker Effort 483 Kevin J. Boudreau and Karim R. Lakhani Comment: Iain M. Cockburn V. Panel Discussion: Innovation Incentives, Institutions, and Economic Growth The Innovation Fetish among the Economoi: Introduction to the Panel on Innovation Incentives, Institutions, and Economic Growth 509 Paul A. David Innovation Process and Policy: What Do We Learn from New Growth Theory? 515 Philippe Aghion VI. The Social Impact of Innovation 11. The Consequences of Financial Innovation: A Counterfactual Research Agenda 523 Josh Lerner and Peter Tufano Comment: Antoinette Schoar 12. The Adversity/Hysteresis Effect: Depression-Era Productivity Growth in the US Railroad Sector 579 Alexander J. Field Comment: William Kerr 13. Generality, Recombination, and Reuse 611 Timothy F. Bresnahan Comment: Benjamin Jones VII. Panel Discussion: The Art and Science of Innovation Policy The Art and Science of Innovation Policy: Introduction 665 Bronwyn H. Hall Putting Economic Ideas Back into Innovation Policy 669 R. Glenn Hubbard
- 15. x Contents Why Is It So Difficult to Translate Innovation Economics into Useful and Applicable Policy Prescriptions? 673 Dominique Foray Can the Nelson-Arrow Paradigm Still Be the Beacon of Innovation Policy? 679 Manuel Trajtenberg Contributors 685 Author Index 689 Subject Index 697
- 16. 1 Introduction Josh Lerner and Scott Stern I.1 Introduction Innovation—whether in the form of new products such as the iPad, new ways of incorporating process technologies such as bar coding, or new man- agement practices—is critical to economic growth. This is particularly true in mature economies such as the United States and Europe, where pressing fiscal and demographic challenges preclude many other avenues to growth. But despite the critical nature of innovation, much remains unclear as to how nations, firms, and academic bodies can encourage this activity. While impressive strides have been made in understanding the economics of inno- vation over the past few decades, much about this activity remains uncertain or even mysterious. This volume explores what we do and do not know about this critical area. It is based on the proceedings of the National Bureau of Economic Research (NBER) 50th Anniversary Conference in honor of the influential 1962 volume, The Rate and Direction of Inventive Activity: Economic and Social Factors, edited by Richard Nelson. We saw the anniversary of that volume—seen by many as having ushered in the modern era of study of the economics of technological change—as a timely opportunity to not only take stock of the economics of innovation and technological change, Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, with a joint appointment in the Finance and the Entrepreneurial Management Units, and a research associate and codirector of the Productivity, Innovation, and Entrepreneurship Program at the National Bureau of Economic Research. Scott Stern is the School of Manage- ment Distinguished Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the Massachusetts Institute of Technology Sloan School of Management and a research associate and director of the Innovation Policy Working Group at the National Bureau of Economic Research.
- 17. 2 Josh Lerner and Scott Stern but also to bring together leading scholars to identify the shape of the field going forward. As the discussions by Arrow, Nelson, and Rosenberg and Stern later in this volume highlight, the backdrop for the 1960 conference was the grow- ing recognition of the role of technological change in economic growth. This insight—which grew out of the insights of Abramovitz, Kendrick, and Schmookler, and the key work of Solow—highlighted that increased inputs (e.g., more capital expenditures and workers) could only explain a modest fraction of American economic growth over the past century. As Nelson noted in his introduction to the 1962 volume, “The lion’s share had to be attributed to something else: to increased productivity or efficiency.” While this insight sparked a desire to understand the nature of techno- logical innovation, there was also a more practical motivation. The Soviet Union’s launch of the Sputnik satellite had raised alarms about the United States’ competitive positioning, and led to a need to better understand the circumstances through which scientific insights could be translated into new defense and space technologies. Along with the creation of the Na- tional Science Foundation and the creation and availability of more data on research and development activities, the time was ripe for a more systematic research program in economics on both the causes and consequences of invention and technological change. The 1960 conference brought together many leading thinkers of the era, and resulted in a volume whose influence extended well beyond the typical conference volume. A number of papers have resonated through the decades, but none more than the final essay, Arrow’s “Economic Welfare and the Allocation of Resources for Invention.” In it, Arrow lays out the implica- tions of the conflict between the low social cost of using knowledge and the high cost of producing it, and the subtle ways in which information and knowledge are distinct economic goods. The implications for firms seeking to appropriate returns and for social welfare are substantial, as the author explicates. The five thousand-plus citations that this essay has on Google Scholar are a testimony to the power of these ideas. But to focus on this one essay misses the richness and breadth of the 1962 volume. The conference brought together a rich array of methodologies, from theory to large-sample empirical analyses to economic history to case studies. The range of topics was broad, from the nature of appropriability to the role of organizational structure in shaping research and development productivity. Not surprisingly, (in light of both the times and the affiliation of a number of the authors with the RAND Corporation), there was a heavy emphasis on the nature of publicly funded innovation, particularly in the defense sector. The conference, as its subtitle suggested, also explic- itly sought to draw in perspectives from other social sciences. Thus, the volume simultaneously provided general building blocks for understanding the innovation process and reflected the issues of its day.
- 18. Introduction 3 The current volume builds on this legacy. Organized under the aegis of the NBER’s Innovation Policy Working Group, the conference and this volume seek to honor and assess the original volume, and sponsor new theoretical and empirical contributions on fundamental questions in the economics of innovation and technological change. An explosion of empirical and theoretical research in the economics of technological change, as well as contemporary policy challenges, suggests an opportunity for reevaluation of the traditional innovation policy framework. Among the questions that we sought to grapple with were: • How do innovation and diffusion depend on the institutional environ- ment in which new technology is developed and commercialized, and how are the drivers of innovation changing over time? Does the per- vasive diffusion of information technology impact the economics of knowledge accumulation itself? • What is the role of “open”research environments (from scientific com- munities to the open-source software movement) in innovation? What are the economic and institutional drivers of open-access versus pro- prietary innovation models, and how does institutional design impact innovation outcomes? • What determines the allocation of research investment between the public and the private sector (and what should determine that alloca- tion)? What role do universities (and other nonprofit research institu- tions) play in long-term technical change and economic progress? • How do innovation and diffusion impact economic growth? Has tech- nical change moderated or exacerbated macroeconomic fluctuations? What is the relationship between innovation and economic inequality, both within and across countries? What is the role of innovation—as a driver or a remedy—in the current economic crisis? We sought to achieve these goals through two approaches. First, we circu- lated a call for papers, and encouraged submissions from leading scholars. These essays were refined through discussions in a July 2009 preconference at Laguna Niguel, California, and formal presentations and discussions in the September 2010 conference in Warrenton, Virginia. We recorded and edited the discussants’ remarks from this conference to give a fresh perspective on the issues raised by the authors. In addition, we incorporated into the confer- ence three panel discussions, which took a broader view of the issues under consideration. The key presentations from these discussions (though not the lively back and forth that ensued) are also captured in this volume. At the same time, we should acknowledge that in some respects, we were less ambitious than the 1960 volume. Given the explosion of economics research into innovation, not to mention the great growth of work on the topic in the strategy, technology management, and social psychology lit- eratures, we decided to keep a sharp disciplinary focus. (It should be noted,
- 19. 4 Josh Lerner and Scott Stern though, reflecting the broadening of the economics literature during this period, a number of papers cross over into topics that have typically been the purview of economic sociologists and other social scientists.) Nor did we try to explicitly duplicate the many case studies in the 1962 volume, though many papers use field research techniques. The success of this conference was a function of many people and organi- zations. The Scientific Committee—Philippe Aghion, Ken Arrow, Richard Nelson, Manuel Trajtenberg, and Hal Varian—helped to shape the vision and agenda for the conference. They also helped considerably to boost this effort through their contributions. Both Marty Feldstein and Jim Poterba, the current and former NBER presidents, were uniformly supportive of this idea. Patrick Gaule, the 2010 to 2011 NBER Innovation Policy fellow, played a key role in organizing the conference and the production of the volume. Hal Varian gave a thoughtful and provocative after-dinner talk at the event. Carl Beck, Brett Maranjian, and Rob Shannon of the NBER conference department provided critical logistical support. The Kauffman Foundation was generous in their support of this initiative, playing a key role in sup- porting the Innovation Policy effort at the NBER more generally as well as funding this particular conference. We are particularly grateful to Bob Litan, Carl Schramm, and Bob Strom. I.2 Broad Themes In developing the agenda for the conference, we sought to focus on forward-looking research that offers direction for the field going forward. As one considers the essays as a whole, it is useful to highlight four thematic clusters: the university-industry interface, the interdependency between market structure and innovation, the sources of innovation, and the social impact of innovation. I.2.1 The University-Industry Interface One topic that received relatively little scrutiny in the 1962 volume, but much more attention here, was the university-industry interface. Certainly, many authors espoused a belief that basic research was important for inno- vation, and called for more work in the area. But to a large extent, much of the focus was on government and corporate research. This volume considers the consequences of academic research to a considerably greater extent. Of course, this shift in emphasis largely reflects real-world developments over the past five decades. The passage of the Bayh-Dole Act in 1980 and the proliferation of multibillion-dollar companies founded on university research (from Genentech to Google) have vastly increased the economic profile of these activities. Moreover, the revolution in data availability— particularly, the detailed data on citations of papers and patents—has facili- tated work in this area.
- 20. Introduction 5 Gans and Murray take a broad, conceptual look at the issues associated with funding academic research. They begin with a paradox: when agen- cies funding scientific research emphasize basic research over translational projects, they are criticized for their impracticality, but when they emphasize near-term mission-oriented R&D projects, they are criticized for crowd- ing out what industry would have done otherwise and backing redundant efforts. To help sharpen our thinking about these issues, the authors present a model in which the supply of and demand for public funds plays out in a world where private funding sources also exist. In their model, public officials can decide not simply which projects to fund, but also what requirements regarding scientific openness to add. They show that the choices regarding funding sources—and the impact of pub- licly imposed requirements around disclosure—will vary not only with the scientific merit of the research proposal, but also with the immediacy of its applicability to commercial uses. In particular, they highlight that providing unrestricted public funds (i.e., without any disclosure requirements) may lead to many researchers who would otherwise be industry funded accepting public dollars: this can actually lead to fewer projects being funded overall without consequent gains in openness. Though some of the key issues raised here have long been recognized—indeed, both Nelson (1959) and Nelson’s careful study of the transistor in the 1962 volume raised related issues— Gans and Murray provide fresh insight into the subtle ways that public and private funding interact, and the role that government policy (e.g., mandat- ing openness) plays in shaping the production and use of knowledge. Azoulay, Graff Zivin, and Sampat look at the consequences of academic mobility: to what extent does the movement of high-achieving faculty mem- bers affect both scientific and commercialization activities at their old and new schools? To examine this, they look at articles published by and patents granted to the mobile scientist before he departed for the new school, com- paring these to similar outputs by scientists who did not move. In this way, they hope to limit the heterogeneity that can distort simpler comparisons. The analysis suggests that the citations to a departing scientist’s articles from the university where he or she departs are barely affected by the move. But citations to the departing scientist’s patents (whether made in articles or patents) decline sharply at the originating school. This suggests that the physical proximity of the researcher is important to ensuring knowledge flows to industry. Not surprisingly, citations to the scientist’s work at his or her new location increase dramatically once the move is complete. The authors offer the intriguing conclusion that barriers to scientific mobility may actually be socially detrimental, as they prevent the kind of knowledge gains from the mixing of ideas. Kahn and MacGarvie also explore the impact of scientific mobility, focus- ing on the Fulbright Foreign Student Program, which since 1946 has brought students from many countries to undertake graduate studies in the United
- 21. 6 Josh Lerner and Scott Stern States, with the expectation that they spend at least two years in their home nation before they can return. Like the prior paper (though with a substan- tially smaller sample and less exact controls), they compare the output of the Fulbright scientists with a set of otherwise similar scientists who studied in the United States without such a return requirement. Tracing the subsequent career of these researchers, the authors find that the Fulbright scientists (relative to the controls) spent more than twice as many of their postgraduation years outside the United States when com- pared to controls. While the program does increase collaborations between US scientists and those based in the emerging world, Fulbright scientists from poorer nations or those with a weaker scientific tradition have fewer publications and less of an impact. This effect is not seen among those schol- ars from wealthier nations or those with a stronger scientific base. These last two chapters suggest one profound difference between the two volumes: the vast increase in data availability. The richness of citation and personnel data has given us both the ability to test relationships that previ- ously could only be discussed abstractly or else explored only in case studies. It also underlines the importance of phenomena that were previously not fully appreciated, such as the impact of geographic proximity on knowledge spillovers, a topic that received little mention in the 1962 volume. I.2.2 Market Structure and Innovation A second cluster of chapters focuses on a question that goes back at least to Schumpeter, but was brought back to prominence within economics with Arrow’s 1962 paper: what is the relationship between market structure and innovation? Bresnahan, Greenstein, and Henderson focus squarely on a central puzzle in this line of research: why are incumbents who are able to succeed within a given technological trajectory often so ineffective at being able to take advantage of a new technological trajectory? This question is particularly salient once one considers the many advantages that incumbents are able to leverage in introducing new technology. Bresnahan, Greenstein, and Henderson undertake detailed case studies of two historically important transitions—the introduction of the personal computer (PC) and the browser—to evaluate this question. Their analysis allows them to both assess the adequacy of existing theories (e.g., antican- nibalization concerns, or the potential for organizational barriers within incumbents) and to identify key patterns that seem to characterize the pro- cess of creative destruction. Their analysis points to a novel driver of creative destruction—diseconomies of scope induced by the presence of necessarily shared assets within the firm. When the strategic commitments made by an incumbent are necessarily reflected in business activities for both the old and the new technological trajectory, the incumbent may not simply be able to create a “firm-within-a-firm”to preempt competitive entry. The fact that the incumbent must simultaneously sell both the new and the old technologies
- 22. Introduction 7 may put them at a disadvantage in both technologies relative to an entrant; these disadvantages can be observed through the significant organizational conflicts that accompany technological transitions. The case study approach (though out of favor at traditional econom- ics journals) allows Bresnahan, Greenstein, and Henderson to undertake a close reading of the evidence. This leads to a novel hypothesis about the underlying forces that may be at the heart of many cases of incumbent fail- ure in the face of the gale of creative destruction. Spulber offers a complementary perspective on this question by consider- ing how the strategic interaction between incumbents and innovators in the market for ideas shapes (and is shaped by) the potential for product market competition. On the one hand, if the market for ideas is efficient (e.g., there can be perfect, low-cost transfer of both new designs and process innova- tions), then incumbents and entrants will have an incentive to cooperate (rather than compete) in the commercialization process. However, when technology transfer (of either product designs or processes) is imperfect, then innovators will have an incentive to enter the product market (and so start-up innovation will be associated with increased competition). The question then arises: when is entry more likely? While Spulber con- siders a range of cases (and some of the results are subtle), an overarch- ing lesson of the analysis is that the incentives for entry are higher when the underlying technologies are more (horizontally) differentiated from each other. Since the gains from cooperation are higher when the degree of differentiation is lower, the likelihood of entrepreneurial entry is higher under conditions of high product differentiation and imperfect technology transfer. Spulber highlights the idea that the impact of start-up innovation on market structure depends crucially on the nature of strategic interaction between start-ups and established firms, and that such strategic interac- tionisitself goingtodependonthespecificnatureof theinnovationsimpact- ing an industry at any point in time. Daron Acemoglu also considers how strategic interaction impacts the relationship between innovation and incumbency, but places emphasis on a dynamic setting that incorporates not simply the rate but also the direc- tion of innovative activity. Specifically, Acemoglu considers an environment where there are multiple potential “research lines,”but only one research line is commercially active at any point in time. Acemoglu is particularly inter- ested in cases where there is a chance that the commercially active research line will at some point be made obsolete (e.g., as the result of exhausting a natural resource), and focuses attention on the underlying incentives to invest in the alternative (but not yet commercially viable) technology line. Since the returns from innovation are only realized for those generations where the research line is commercially active, the private returns to innova- tion in the alternative line will be low unless there is a high likelihood that the currently active line is about to made obsolete.
- 23. 8 Josh Lerner and Scott Stern This analysis highlights an important externality: while the social planner would prefer investments on the alternative research line (so that the level of this technology is at a high when the other technology is made obsolete), the private incentive to invest in the alternative research line is too low. In considering the impact of alternative policy approaches, Acemoglu surfaces a novel argument for public funding of a diverse set of research approaches: researchers with different incentives, capabilities, or perspectives may con- tribute to a more diverse research portfolio, and so contribute to economic growth. Finally, Carl Shapiro turns our attention to how these types of analyses can inform innovation policy. In an essay that clearly captured the prize for the most clever chapter title, Shapiro offers a synthetic assessment of how the lessons of the economics of innovation inform merger analysis. Shapiro contrasts two dominant perspectives that inform merger analysis: Arrow versus Schumpeter. Where the Arrow approach suggests the positive impact of product market competition on innovation, the Schumpeter perspec- tive focuses instead on the innovation inducements due to scale and the prospects of market power. Shapiro emphasizes that these two perspectives—often taken to be con- tradictory—are not at all incompatible with one another, at least as they apply to policy analysis. While recognizing that the relationship between innovation and market structure is quite complex, Shapiro focuses on three key principles that build on the insights of both the Arrow and Schumpeter perspectives. By so doing, they can help us understand the impact of merg- ers on innovation incentives. Specifically, Shapiro highlights the idea that innovation is enhanced when (a) firms have the prospect of either gaining or protecting sales by providing additional value to consumers (the Contest- ability Principle), (b) the level of intellectual property protection is higher (the Appropriability Principle), and (c) complementary assets can be com- bined to enhance innovative capabilities (the Synergy Principle). Illustrating the role of these principles in clarifying the innovation impact of mergers in particular cases and circumstances, Shapiro’s essay highlights the role of careful economic analysis in helping to clarify policy analysis, and how long-standing conceptual frameworks can be enriched by careful, formal reconsideration. Taken together, this second group of essays provides a very useful delin- eation of our understanding of the relationship between innovation and market structure. Fundamentally, the economic analysis of market-based innovation incentives relies on a dynamic understanding of how innova- tion shapes (and is shaped) by industrial organization. These dynamics are themselves dependent on both the nature of competitive interaction between different technologies, and the organizational consequences of innovation. Interestingly, as a number of the authors and discussants remark, there are too few systematic studies of this process, and it has been difficult to bridge
- 24. Introduction 9 the gap between the types of qualitative and theoretical insights emerging from these chapters and the type of empirical research that tends to domi- nate scholarly discussion. That gap surely represents an important direction for future research. I.2.3 The Sources and Motivations of Innovators A third cluster of chapters focuses more directly on the incentives and motives of inventors and innovators, and highlights the role of institutions in shaping the behavior of individuals and firms in producing new technol- ogies. Moser and Rhode consider the impact of formal intellectual property rights—specifically, the Plant Patent Act of 1930—on innovation. While standard economic theory suggests that the introduction of formal intellec- tual property protection should enhance appropriability and the incentives to innovate, there are only a very small number of cases where economists are able to observe whether a change in intellectual property law results in a change in the degree or nature of innovation in a particular area. Moser and Rhode focus on the impact of the Plant Patent Act on patenting and innova- tion in roses, which were the plant variety most impacted by the Act (nearly half of all plant patents between 1930 and 1970 were for rose varieties). An important element of their analysis is that they are able to distinguish between the impact of the Act on patenting (which of course increased) versus the impact on innovation (which they measure in terms of new rose registrations). Their empirical evidence poses an important challenge for the standard theory: after 1930, the number of registrations by American nurseries actu- ally fell, and European nurseries accounted for an increasing share of new rose registrations. Instead of increasing the rate of innovation, it seems that the Plant Patent Act may have had the consequence of increasing the relative importance of commercial nurseries relative to hobbyists in the American industry, and spurred the use of patents as a defensive and strategic tool in the context of litigation. Importantly, the findings of Moser and Rhode are made more plausible by the fact that there are important nonpecuniary motivations on the part of (at least an important group of) innovators in this area; prior to the Plant Patent Act, both hobbyists and public sector breeders played an important role in establishing distinctive American rose varieties, but their role was diminished thereafter. Mokyr and Meisenzahl offer a complementary perspective, offering an economic history approach of the peculiar nature of innovators and their motivations and interests during the British Industrial Revolution. Their analysis focuses in particular on the body of individuals who advanced tech- nology and innovation during this period. Moving beyond the celebration of specific individuals responsible for macroinventions such as the steam engine, Mokyr and Miesenzahl focus in particular on “tweakers”—indi-
- 25. 10 Josh Lerner and Scott Stern viduals involved in the process of incremental improvement and refinement central to cumulative technical progress. Their analysis builds on a novel database of such individuals, and offers a portrait of their careers. Most notably, Mokyr and Miesenzahl provide suggestive evidence that formal intellectual property rights such as patents likely played (at best) a limited role in the incentives and compensation of tweakers. Instead, their primary incentives seem to be associated with the reputation-based and first-mover advantages associated with innovation, as well as the rewards to be gained through prize mechanisms or nonpecuniary rewards such as membership in societies and the like. Similar to Moser and Rhode, this anal- ysis suggests that, in the presence of multiple innovation incentive instru- ments, the traditional arguments for patents may be weakened. Perhaps more importantly, the chapter opens up a critical window into both the motives and training underlying incremental innovation. As such, the chap- ter addresses an important concern: one of the enduring challenges among students of technology has been the difficulty of moving beyond the study of formalized, often patent-oriented innovation to the many more informal processes through which technologies are improved. Finally, Boudreau and Lakhani directly confront the impact of innovator preferences on innovation and research productivity. Their chapter reports on an actual field experiment that tests for the influence of “sorting” on innovator effort. They focus in particular on the potential heterogeneity among innovators in whether they prefer a more cooperative versus competi- tive research environment. The focus of the field experiment is a real-world multiday software coding exercise in which participants are able to express a preference for being sorted into a cooperative or competitive environ- ment (i.e., incentives in the cooperative environment are team-based, while incentives in the competitive environment are individualized and depend on relative performance). Half of the participants are indeed sorted on the basis of their preferences, while half of the participants are assigned to the two modes on a random basis. Boudreau and Lakhani find strong evidence that sorting matters: those who prefer a competitive regime exert twice as much effort when they are assigned to that regime, and those who prefer a cooperative regime also increase their effort by 50 percent when they are assigned to their preferred regime. In addition to the sheer novelty of their experimental approach for the economics of innovation, their substantive results once again highlight the important role that motivation and preferences play in understanding innovative activity. Not simply a matter of providing appropriate incentives for effort, innovators exhibit strong preferences over the organization and incentives in their work environment, and the ability to match workers with their preferences has significant effects on overall research productivity. Similar to the findings of the earlier volume, these detailed empirical stud-
- 26. Introduction 11 ies of the motives of innovators pose a significant challenge to traditional economic models of incentives for innovators. For example, in all three stud- ies there seems to be a significant role and interaction with the broader inno- vation “community.” The historical evidence from the tweakers of Mokyr and Miesenzahl and the rose growers in Moser and Rhode suggests that the patent system, in particular, either played a limited role or (in the case of Moser and Rhode) may actually have undermined innovation incentives on the part of individual growers. As we discuss further later on, a great deal of the panel discussions and commentary at the conference focused on the drivers of volunteer contributors, which we may refer to as “wiki-motives.” What is the impact of traditional innovation policy instruments such as pat- ents or prizes in environments when innovators are motivated by recognition and community concerns rather than monetary payoffs? How important are such motives in understanding aggregate innovative effort, and how has this varied across time and context? I.2.4 The Social Impact of Innovation A final grouping of chapters grapples with what is undoubtedly the most challenging issue in the economics of technological change: assessing the social consequences of innovation. As Paul David points out in his discus- sion, an implicit assumption of policymakers today is that more innovation is undoubtedly a good thing. Economic theory takes a more cautious view, suggesting that the private sector can engage in too much as well as too little innovation. Part of the reason for the presence of misconceptions, of course, is that the assessment of innovations’social impact is a daunting task. While industrial organization economists have made great strides in developing structural models that allow social welfare calculations over the past few decades, the types of dynamic changes that characterize important innovations defy ready characterization. The three chapters in this section take differing approaches to this challenging issue. Lerner and Tufano explore the broader impacts of financial innovation. This class of breakthroughs—which attracted no real discussion in the 1962 volume—has broad impacts: not only do financial services represent a sig- nificant economic share (estimates in the United States run as high as over 30 percent1 ), but in an ideal world, they enable households to have new choices for investment and consumption, and firms to raise capital in larger amounts and at a lower cost than they could otherwise. At the same time, financial innovation has been criticized by Paul Krugman and others as a key driver of the recent global financial crisis. In this chapter, the authors review the literature on financial innovation 1. Available at: http://www.ggdc.net/databases/10_sector.htm.
- 27. 12 Josh Lerner and Scott Stern and highlight the similarities and differences between financial innovation and other forms of innovation. The chapter proposes a research agenda to systematically address the social welfare implications of financial innova- tion. To complement existing empirical and theoretical methods, the authors propose (and take some initial steps toward) the examination of case studies of systemic (widely adopted) innovations, explicitly considering counterfac- tual histories had the innovations never been invented or adopted. Field takes a close look at the boom-bust pattern that characterizes many industries. During the boom period, there is a dramatic accumulation of physical capital—think of the huge efforts to lay broadband during the Internet boom of the late 1990s—followed by a contraction. In the short run, it is easy to see how such a contraction leads to a decline in productivity, as excess capacity lies unused. But this chapter is interested in a more challenging question: what are the long-run consequences of these boom-bust cycles? To what extent are the resources accumulated during booms the appropriate ones, or do they rep- resent wrong-headed investment decisions brought about by a frenzied mar- ket? To examine these questions, Field examines the experiences of railroads during the Great Depression. This was a difficult period for the industry: the economic downturn, along with increased competition from automobiles and trucks, led to a sharp contraction in demand for railroads. Moreover, access to capital was largely cut off after a period of heavy expenditures. He shows that the industry undertook a major restructuring to utilize labor and capital resources more effectively. Both capital and labor inputs declined substantially. Yet logistical innovation enabled railroads to record slightly more revenue ton miles of freight and book almost as many passenger miles in 1941 as they had in 1929. Adversity seems to have triggered a wave of innovation in this industry. In the final chapter in this cluster, Bresnahan focuses on the recombi- nation and reuse of key general purpose technologies (GPTs), which he defines as widely used discoveries capable of ongoing improvement that enable complementary innovations. He argues that a critical factor behind the creation of these key technologies is the extent to which the broad pros- pects for reuse can be anticipated. Bresnahan distinguishes between two kinds of knowledge. He argues that technical knowledge—the understanding of how a firm can transform a technology into a product—is relatively commonplace. But an under- standing of market demand and how an invention might be used in other sectors—which he refers to as entrepreneurial knowledge—is a rarer and more valuable asset. Because of the scarcity of entrepreneurial knowledge, the returns from developing a GPT may be much lower than they would be otherwise. But over time, through a process of innovations and product introductions, this scarce entrepreneurial knowledge may become much more widely known. He illustrates his theory with a number of cases from
- 28. Introduction 13 the information technology industry, where important GPTs were only de- veloped after numerous false starts. These three chapters take very different approaches to understanding the broader impact of innovation on social welfare. Despite the challenging nature of these questions, and the absence of well-accepted answers, the importance of this topic remains a major challenge to the economics of technological change. I.3 Panel Discussions In addition to the formal papers (and discussions), the conference in- cluded three panel discussions. By design, the panels were intended to be provocative, and to identify key research challenges going forward. Though each of the three panels were different in both style and substance, each significantly expanded the scope of discussion within the conference, and highlighted some of the central limitations of current models or empiri- cal methodologies. The volume includes short contributions by nine of the panel chairs and participants, based on transcripts of their remarks. The first panel—“The Impact of the 1962 Rate and Direction Volume: A Retrospective”—explicitly linked the 1960 and 2010 conferences, and included commentaries by two of the central participants in that earlier effort. Rosenberg and Stern began the discussion with a critical assessment of the 1962 volume, with a focus on identifying why that earlier volume turned out to be so influential on subsequent scholarship. The central con- tention of their remarks is that the Rate and Direction Conference can be interpreted as a reaction to the work by Solow and others highlighting the aggregate implications of technological change. More than simply a debate about the nature of the “residual,” the 1960 conference focused attention on the central economic questions raised by inventive activity, innovation, and technological change. Specifically, the original conference highlighted (a) the nature of innovation as an economic good, (b) the economics of the organization of research and development, and (c) the industrial organiza- tion of innovation-intensive industries and sectors, with a particular focus on dynamics and evolution. As a marker in the history of economic thought in this area, a central contribution of the earlier conference was to crystallize the questions and issues that would come to dominate the microeconomics of innovation and technological change for the foreseeable future. Nelson expanded on these themes. He focused on some broad lessons that have emerged since the earlier conference and also on important method- ological issues that have been raised. Nelson noted that an important divide exists between the type of theory and empirical research emphasized within the United States (and within the NBER) and the interdisciplinary, evolu- tionary approach that has been emphasized by researchers such as those at the Science Policy Research Unit (SPRU) in the United Kingdom. Nelson
- 29. 14 Josh Lerner and Scott Stern argued that some of the underlying tensions between these two camps were foreshadowed in the earlier volume: the largely empirical tradition pioneered by Kuznets and Schmookler (and reflected in the NBER Productivity Pro- gram and its growth under Zvi Griliches) sat alongside (sometimes uncom- fortably) the detailed case studies or innovation systems studies emphasized within the evolutionary tradition. Arrow took a broad view of the issues that both conferences grappled with. His comments crystallized why economists have had such difficulty in clarifying the nature of innovation as an economic good: “How can you have a theory of the unexpected?” Arrow highlighted the idea that the eco- nomics of innovation must confront and incorporate some of the unusual properties of innovation, both in terms of its production (e.g., the significant level of uncompensated effort toward inventive effort, in areas ranging from medicine to Wikipedia) and use. These panelist remarks (and subsequent discussion) highlighted how the peculiar nature of innovation poses an ongoing challenge to theory and measurement. They illustrated why the wide-ranging and exploratory nature of the 1962 volume has had such a significant and long-lived impact on subsequent work. In many ways, the second panel—“Innovation Incentives, Institutions, and Economic Growth”—built on the first panel, reconsidering the implica- tions of innovation and technological change. Paul David opened that panel with a deliberate mission—“mass provocation.”He focused his remarks on the underlying (though often implicit) assumption among economists that a higher rate of innovation is almost always preferred. David pointed out that the social impact of technological change depends not only on innova- tion but on diffusion. The ultimate impact of research investments depends on how those research investments are organized, and the complex process by which technologies are improved and adapted over time and context. Without considering the dynamic process by which social systems adapt and incorporate technological change, it is difficult to consider the net impact of new technologies on human welfare. PhilippeAghionlookedatarelatedquestion,theimplicationsof advances in endogenous growth for both macroeconomics and microeconomics. Aghion argued that a major contribution of theories of economic growth that explicitly endogenize the production and diffusion of technology is to identify the potential policy impacts of different types of intervention. Aghion stated that contemporary policy matters insofar as it facilitates a higher level of innovative investment and shifts the long-run growth rate. A range of recent evidence highlights the role of ensuring the ability to protect ideas (e.g., a stronger patent system) in economic growth, and the potential benefits of “industrial policy” measures. Paul Romer also contributed remarks to the panel (not included in this volume), focusing on the dynamic interplay between different types of the-
- 30. Introduction 15 ory (e.g., verbal versus formal). Consistent with Aghion’s discussion, Romer emphasized the specific contribution that models of endogenous growth have played; in one example, Romer highlighted the central role that appro- priability conditions play in determining the rate of aggregate long-term technological change. The panel put a spotlight on the central role of policy and institutions in shaping the long-term rate and direction of technological change, and the value of bridging more narrow studies of the innovation process with more aggregate treatments in order to clarify the long-term drivers of economic growth. These themes then were reinforced in the final panel discussion—“The Art and Science of Innovation Policy.” After brief remarks by Bronwyn Hall, Glenn Hubbard focused on some of the challenges of developing and implementing well-designed innovation policy initiatives. Hubbard pointed out the disjunction between arguments for particular policies—for example, a particular tax rate or regulatory change—and the broader evidence that the rate and impact of innovation reflect broader measures of the overall innovation environment. Hubbard also emphasized the disjunction between academicandpolicyapproaches.Healsohighlightedtheroleof certaintypes of institutions—for example, long-term interagency working groups—in facilitating a more sophisticated innovation policy-making process. Dominique Foray reinforced these ideas, focusing in particular on the limited influence of economic science on policy making. Reflecting on his experiences within Europe, Foray argued that policy debates are often char- acterized by a low level of empirical sophistication, and that conditional statements or caveats often result in a diminished impact of rigorous eco- nomic analysis. Foray also highlighted that the bulk of innovation policy initiatives have been focused on enhancing the overall rate of innovation, but that an increasing share of innovation policy challenges are now about the direction of innovation (e.g., addressing climate change). Finally, Trajtenberg considered the broader legacy of the Nelson-Arrow paradigm (with its focus on appropriability and the role of government support for early-stage research) on innovation policy. Trajtenberg high- lighted that many of the central challenges facing innovation policymakers cannot be addressed directly through the Nelson-Arrow framework. For example, while the Nelson-Arrow framework assumes a single potential public funder, the question facing policymakers today is how much should an individual country fund, given the global nature of research and the potential to benefit from research conducted in other jurisdictions. Similar to the other panelists, Trajtenberg also remarked on the limited influence of rigorous economic analysis on actual policy, and suggests a focus on more policy-oriented research. These panel discussions raised a rich array of issues. While there were more questions than answers, they suggested a variety of topics that should reward scrutiny by researchers in the years to come.
- 31. 16 Josh Lerner and Scott Stern I.4 Crosscutting Insights and Themes Taken as a whole, the chapters and discussions highlight some crucial and novel insights into the economics of innovation and technological change, and the role of policy and institutions in shaping innovation, diffusion, and ultimately, the social returns to technological change. While this volume cannot capture the full range of these more subtle implications, it is worth- while to highlight a few central and novel ideas that were surfaced during the conference. I.4.1 Innovation Externalities The conference raised the hypothesis that the underinvestment problem is more pervasive, more subtle, and perhaps more pernicious that is usually understood. Building on the classic treatments of Nelson (1959) and Arrow (1962) emphasizing appropriability, a great deal of economics research has focused on how to provide sufficient market-based incentives for innovation (without inducing dissipative racing or rent-seeking). A number of papers in the conference suggested, however, that our tra- ditional understanding of the appropriability problem does not go far enough. Bresnahan, for example, emphasizes the idea that the history of general purpose technologies suggests that the conditions giving rise to their initial development usually arise in the context of a narrow application. This analysis suggests that innovation incentives are shaped by the pro- spective returns associated with that narrow application, rather than the returns associated with the diffusion of the general purpose technology. Externality problems can arise when the information about the potential impact of a new technology is widely diffused, so that commercialization of a general purpose technology depends on the coordination of multiple economic actors. In that case, no single actor can understand or appreciate the potential social impact of that innovation from an ex ante perspective. As Ben Jones emphasized in his discussion, “the fact that you can’t iden- tify the recombinant possibilities ex-ante means that you can’t easily solve the bargaining problem in practice.” Accordingly, the level of investment focused on general purpose innovations will be low. Though different in its specifics, a similar theme runs through the analysis of Acemoglu. In that chapter, potential innovators will have little incentive to invest in an immature technology that cannot earn immediate commer- cial returns, even though the improvement of that technology over time will yield significant social benefits once an older technology becomes obsolete. Of course, it is possible that property rights could be specified in a way so that early innovators in alternative technologies retained some claim on the returns that ultimately arise from research lines that they are associated with; however, such rights would themselves pose a disincentive for later- stage innovators.
- 32. Introduction 17 Gans and Murray broaden the scope further in their analysis of disclosure and knowledge accumulation. They highlight the idea that, even if the incen- tives for research investment are appropriate, the incentives for disclosing the knowledge resulting from that research are shaped by the strategic and institutional environment. Not only is there a significant gap between the private and social incentives for disclosure, but what seems to be a straight- forward policy solution—such as mandating the disclosure of publicly funded research—can actually reduce the net level of disclosure (by push- ing researchers to accept privately funded research contracts that mandate secrecy). Together, these insights (and others dispersed throughout the volume) suggest that a central insight of the 1962 volume—the gap between the private and social returns to inventive investment—remains not only rele- vant today but is likely to stand as a central concern in the economics of innovation for the foreseeable future. I.4.2 Agency Costs and Innovation Another theme had to do with the impact of agency costs on the success of innovation projects. This theme—which was only dealt with implicitly in the 1962 volume—cut across a variety of the papers. Innovative projects are a natural place to see agency problems at work. Typically, there is sub- stantial uncertainty as to whether a project will work or what the output will be, making the monitoring of effort or contracting on outputs difficult. The researcher is likely to have far more information about the intricacies of the project than his or her supervisors or financiers. In many cases, there are few tangible assets associated with the project making contracting particularly difficult. Market booms and bust may lead to dramatic shifts in the assess- ment of projects and availability of financing. Against this backdrop, it is not surprising that economists have high- lighted two important agency problems. The first has to do with the way in which innovators are rewarded. The second has to do with the way in which the firm itself is structured, and in particular the trade-offs associated with firm scope. While a number of the papers in the 1962 volume explored the role of individual researchers and the organization of firms, few (the Rubenstein paper is a notable exception) grappled with agency issues. Of course, this reflects the fact that agency theory was not formalized until the 1970s, and that the extent of agency problems in innovation was not thoroughly delineated until works such as Holmstrom (1989) and Aghion and Tirole (1994). In this volume, the impacts of agency problems in innovation are far more widely recognized. Mokyr and Miesenzahl highlight the many incen- tives that were offered to British inventers during the Industrial Revolution, ranging from prizes to patents to consulting opportunities. The results from large-sample studies of the effects of incentives on individual researchers
- 33. 18 Josh Lerner and Scott Stern are more mixed. Boudreau and Lakhani show how incentives impact the output of software programmers, but that this relationship is mediated by the coders’preferences regarding incentive schemes. Moser and Rhode show that increased incentives—in the form of stronger intellectual property rights for plant varieties in the United States—seem to have not led to more innovation by American nurseries relative to their European counterparts. At the firm level, Bresnahan, Greenstein, and Henderson explore why two very successful software firms became increasingly unable to respond to competitive threats from new rivals. They argue that neither fears of can- nibalization nor the inability to recognize competitive threats were critical: rather, the need to share key assets across old and new businesses created severe organizational conflict. This volume, then, reflects the increased appreciation of agency problems as a barrier to innovation, and the organizational response that can address them. In a theme we will return to in the final section of this essay, the pro- liferation of new organizational firms and incentive schemes in research- intensive industries suggests that opportunities for research into these is- sues are far from being exhausted. I.4.3 The Analysis of Innovation Policy A third commonality in the volume is the focus on policy analysis, and the role of innovation within economic policy more generally. While a whole collection of chapters in the current volume focus on the university-industry interface, these interactions were (essentially) in the background of the 1962 volume. Whereas universities were once seen as ivory towers, policymak- ers have increasingly come to regard innovation resulting from university research (or collaborative projects) as central drivers of regional economic growth. Though the university-industry interface is seen as ever more important, there has been less attention to how the rules and policies governing these interactions matter. For one example, though the policy origins of the Ful- bright program are remote, the program is a primary driver of how foreign graduate students in the United States are trained. The Fulbright program rules have an important impact on the ultimate research productivity of those involved in the program, particularly those from less developed envi- ronments. Similarly, Gans and Murray emphasize how the rules govern- ing the disclosure of publicly funded research not only affect that research directly but also the governance of research that is funded by the private sector. As Scotchmer emphasized in her discussion of Gans and Murray, “disclosure rules and other details of public funding should be chosen with an eye to how they affect the funding choices of innovators.”More generally, the conference highlights the central role of economic governance and policy for understanding the university-industry interface, and points toward the value of examining specific policies and institutions.
- 34. Introduction 19 A second domain for policy analysis is the intersection between innova- tion and antitrust. As highlighted by Shapiro, the impact of antitrust policy on innovation is increasingly salient, and an emerging set of principles may allow economists to offer more concrete policy guidance for policymakers in this area. Indeed, Shapiro builds on a number of prior analyses published in the NBER’s “Innovation Policy and the Economy” series in developing these principles. However, there is still a significant gap between the type of principles emphasized by Shapiro and the ability to apply those principles in real time to cases that pose potentially significant antitrust and innovation incentive concerns. Finally, it is useful to note what might be seen as a nonfinding: in the one chapter in this volume that directly examines the impact of intellectual property policy, Moser and Rhode find little evidence that enhanced patent protection enhances the rate of innovation (and indeed one can interpret their findings as suggesting the opposite). Moreover, as emphasized in the panel discussion of Paul David, it is not clear that the primary goal of inno- vation policy should simply be to maximize the rate of innovation itself. Ultimately, the policy debate over intellectual property should be guided by the goal of maximizing social welfare, not simply innovations. I.4.4 New Approaches for Studying Innovation Over the past few decades, there has been a much greater emphasis placed intheeconomicsliterature—ledbyfieldssuchaslaboranddevelopment—on ensuring the careful identification of the causal effects behind the phenom- ena under study. A particular emphasis has been on the development of research methodologies that can address concerns about causality, such as experiments and regression discontinuity approaches. This movement has posed real challenges for students of the economics of technological change. In the overwhelming majority of cases, given the substantial economic stakes at work and the magnitude of the investments, it is impossible to get a corporation or government to agree to run an experi- ment in lieu of its usual project management approach. It is a very different thing to randomize the teaching of a few third grade classes than the fund- ing of a potentially multibillion-dollar drug! Moreover, the complexity of the innovation process does not lend itself well to the classic hour-long laboratory experiment. As a result, the approach to addressing causality concerns has been two- fold. First, there has been an emphasis on the development of careful match- ing approaches, which enables the undertaking of difference-in-difference analyses with a minimum of potential biases (as illustrated by the Azoulay, Graff Zivin, and Sampat chapter in this volume). The second has been to find circumstances where some exogenous shifts have allowed the use of an instrumental variable, such as the consequences of the rise of the Nazis and the consequent expulsion of Jewish scientists (Waldinger 2009) and the US
- 35. 20 Josh Lerner and Scott Stern pension reforms that greatly increased the flow of funds into venture capital in the early 1990s (Kortum and Lerner 2000). This volume has two empirical chapters that represent substantial meth- odological departures in the economics of technological change, and thus deserve some special comment. First, Boudreau and Lakhani adopt a field experiment approach, exploiting the flexibility of web-based software devel- opment schemes to offer different incentive schemes to programmers. This approach seems to be an extremely promising one. While it can be argued that the incentive issues are different in software than other arenas—with the relatively finite project scale and the ability of skilled programmers to address a relatively broad array of challenges—this chapter should trigger many other innovation experiments in the years to come. Second, Lerner and Tufano adopt a counterfactual approach to explore the social consequences of a number of financial innovations. While this methodology remains controversial in economic history, it seems desirable to further explore its applicability to addressing some of the broad challenges in assessing the social impact of innovation. Finally, the transformation of another methodology well represented in the 1962 volume deserves comment. As Nelson observes in his remarks, many of the participants in the original conference felt that some of the most valuable insights came from the case studies that represented a substantial share of the program. The history of case studies—or to use the preferred modern parlance, clinical studies—in economics over the past century has been a bumpy one. The representation of such studies in major journals dropped precipitously after the 1950s, reflecting both the strides made by theoretical and empiri- cal researchers and the uneven quality of many of the published cases. But some in the profession still feel that such studies can yield valuable insights into the richness of real-world phenomena, and suggest future directions for theoretical and empirical explorations. Such sentiments led to the initia- tion of the Sloan “Pin Factory” Project at the NBER and the launch of the clinical section of the Journal of Financial Economics. Here, the field-based methodology is still present, though with a twist. There are a number of case-based chapters in the volume, including Bres- nahan, Greenstein, and Henderson, Gans and Moser, Lerner and Tufano, and Moser and Rhode. These chapters can be seen as continuing the field- based tradition in the 1962 volume, but with a more developed theoretical and/or empirical structure than many of those earlier works. I.5 The Agenda Going Forward While the range of topics covered in this volume is substantial, there are also substantial lacunae. It is useful to highlight three critical issues that deserve more attention going forward.
- 36. Introduction 21 The first of these has to do with the globalization of innovation. During the twentieth century, innovation was dominated by a handful of nations, suchastheUnitedStates,Germany,andJapan.Thetwenty-firstcentury—as witnessed, for instance, by the changing distribution of patent filings—has already seen a substantial disruption to this established order. Lying behind this shift is a variety of factors. Governments such as those of China and Singapore have accepted the importance of academic science to economic development, and sought to lure faculty to their national uni- versities, often with substantial investments. Corporations have increasingly sought to exploit the substantial cost savings associated with engineering talent in emerging economies, and what has often started with the overseas transfer of routine technical tasks has expanded in scope and magnitude. Venture capitalists, whether based in Silicon Valley or in emerging econo- mies, have also been an important engine to the diffusion of research and innovative activities. This rapid globalization of innovation poses many challenges to econo- mists. How does the globalization of innovation affect our understanding of the economics of innovation? For example, the innovation system in many Western nations is characterized by a central role for university tech- nology transfer offices in commercializing academic research, the prevalence of younger firms as strategic partners to and competitors with established players, and the challenges that many incumbents have faced in maintaining their initial innovative thrust. The extent to which these patterns will con- tinue to hold in emerging economies is open to debate, and would reward close scrutiny. A second area that deserves more scrutiny is the changing nature of incentives for innovators. Over much of the twentieth century, the struc- ture of corporate research efforts, with their academic-type laboratories and weakly powered incentives for researchers, were largely static. How- ever, the organization of research has seen a sharp transformation in re- cent years. Companies are increasingly relying on strategic alliances and other types of collaborations, and are increasingly proactive in aligning their internal research activities with the innovation system in which they reside. More strikingly, both private and public sector efforts have started to focus on relatively unfamiliar approaches, such as the widespread use of prizes, the proliferation of corporate venture schemes to facilitate spin- outs (and spin-ins), and attempts to harness the creativity and ideas of users and consumers. As was noted at various points in the volume, there seems to have been a significant increase (or at least an increasing awareness) of the roles that volunteers, freelancers, and users play in the innovation process. While a number of chapters in the volume touch on the chang- ing nature of innovation incentives, only Boudreau and Lakhani directly address these issues (and probably not accidentally, do so using a quite novel methodological approach). The study of the subtle ways in which incen-
- 37. 22 Josh Lerner and Scott Stern tives matter for innovation will provide grist for research for the foreseeable future. A third area is an old—but ongoing—one: the appropriate measurement of the consequences of innovation. As discussed earlier, the measurement of the social welfare consequences of innovation poses some daunting chal- lenges, which defy easy solutions. But even more modest goals, such as accounting for the impact of innovative products in national accounts and price indexes, remain problematic. It might be surprising that these issues remain problematic, given that economists have been thinking about them since the work of Kuznets, Schmookler, Abramowitz, Griliches, and Solow in the 1950s. Given the central role of innovation and technological change in long-term economic growth, it is perhaps surprising that so few of the chapters in this volume directly examine the welfare implications of innovation, and none of the empirical chapters undertake a detailed welfare analysis. At one level, this absence underscores the intellectual history of the conference and the par- ticipants, including the microeconomic and phenomenological orientation of the 1962 volume. At a deeper level, however, it highlights a challenge that was raised by Paul David, Ken Arrow, and Dick Nelson in their panel commentaries. The presumed benefits arising from innovation are indeed not only hard to measure, but are in many cases difficult to conceptualize. For example, while there has undoubtedly been progress in the ability to measure the rate of commercialization of particular types of technologies (e.g., university disclosed inventions), does an increase in this rate imply an increase in social welfare? As Acemoglu pointed out in the conference dis- cussion, there are general equilibrium effects that can often be as important as the main effects when undertaking such welfare calculations, and there- fore a great deal of caution should be applied. Moreover, the nature of technological change—most dramatically, the growing importance of the Internet, particularly the set of applications often referred to as “Web 2.0”—has highlighted the limitations of earlier approaches. Perhaps the most dramatic limitation has been the inability of economic frameworks to account for activities that are free: people around the world are spending more time on blogs, Facebook, and YouTube, and consuming less of many traditional media. And while economists can account for the loss of revenue that newspapers have experienced or declin- ing prime-time television advertising rates, the benefits of these alternative activities resist ready quantification. Building better tools for assessing inno- vations that are systemic in nature is an ongoing challenge. The chapters collected in this volume are of necessity limited in scope, as is this survey of the broader territory. One conclusion, though, is inescap- able: the study of the rate and direction of inventive activity remains highly vibrant, and is likely to reward scholars from multiple perspectives in the years to come.
- 38. Introduction 23 References Aghion, P., and J. Tirole. 1994. “On the Management of Innovation.” Quarterly Journal of Economics 109: 1185–207. Arrow, K. J. 1962. “Economic Welfare and the Allocation of Resources for Inven- tion.”In The Rate and Direction of Inventive Activity, edited by R. Nelson, 609–26. Princeton, NJ: Princeton University Press. Holmstrom, Bengt. 1989. “Agency Costs and Innovation.” Journal of Economic Behavior and Organization 12 (3): 305–27. Kortum, S., and J. Lerner. 2000. “Assessing the Contribution of Venture Capital to Innovation.” RAND Journal of Economics 31: 674–92. Nelson, R. R. 1959. “The Simple Economics of Basic Scientific Research.” Journal of Political Economy 49: 279–306. Waldinger, Fabian. 2009. “Peer Effects in Science—Evidence From the Dismissal of Scientists in Nazi Germany.”Centre for Economic Performance. Discussion Paper no. 910. London School of Economics.
- 40. 27 One is tempted to start by saying: In the beginning was Simon Kuznets. We will not in fact start that way, because Kuznets would be more likely to point to larger social forces or institutions rather than specific individuals—he would have been more likely to point to the National Bureau of Economic Research (NBER)—where much of his early research was conducted, and where he trained and worked with his coauthors, colleagues, and former students, including Schmookler, Kendrick, Abramovitz, Fabricant, Deni- son, and others. But our immediate task today is to understand how the 1962 confer- ence volume has ended up playing such an important role in the develop- ment of the economics of innovation and technological change over the last half century. The volume includes an extremely diverse range of essays, from case studies of the organization of R&D to careful measurement studies to conceptual and theoretical papers, most notably Ken’s paper on the nature of invention as an economic good. On their own, many of the papers would stand as important contributions to the field, and any assess- ment of their impact will necessarily be incomplete due to their diversity. However, our contention is to argue that the Rate and Direction volume had a separate and independent effect. Dick used the opportunity of the Rate and Direction Conference to bring together an extraordinary and diverse Why Was Rate and Direction So Important? Nathan Rosenberg and Scott Stern Nathan Rosenberg is the Fairleigh S. Dickinson Jr. Professor of Public Policy Emeritus at Stanford University and an emeritus member of the Board of Directors of the National Bureau of Economic Research. Scott Stern is the School of Management Distinguished Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the Massachusetts Institute of Technology Sloan School of Management and a research associate and director of the Innovation Policy Working Group at the National Bureau of Economic Research.
- 41. 28 Nathan Rosenberg and Scott Stern group of scholars, and focused those scholars on identifying a systematic research program to evaluate (a) the nature of innovation as an economic good, (b) the organization of research and development organizations, and (c) the interrelationship between innovation and the dynamics of industry structure. The volume initiated a systematic research program that offered a timely counterpoint to the macroeconomic approach that equated tech- nological change to “the residual” and treated innovation as exogenous to the economic system. The 1962 volume served a decisive role in establishing the microeconomics of innovation and technological change. To understand this contribution, it is worthwhile to take a brief but infor- mative review of where the field stood in the late 1950s and how it had come to that place. Kuznets (working in large part through the NBER) began, first in the 1930s and then after the war, to systematically undertake a research program focusing on the measurement of economic inputs and outputs with the objective of relating them in some fashion. While measurement had always been a part of economic science, the efforts spearheaded by Kuznets and others involved a very significant increase in the sophistication and comprehensiveness of measurement. Indeed, it is no surprise that the first chapter of the 1962 volume is by Kuznets and is entitled “Inventive Activity: Problems of Definition and Measurement.” It is also unsurprising that the commentary is by Jacob Schmookler. Most importantly, this measurement work demonstrated that the rela- tionship between measured economic inputs (capital and labor) and outputs (gross domestic product [GDP]) was changing dramatically over time and that there was no easy explanation for this. Simply put, the measurement program spearheaded by Kuznets at the NBER illuminated the central eco- nomic fact of US economic history. Of course, the explanatory framework for understanding these empirical findings only emerged in the mid-1950s with the seminal studies of Moses Abramovitz ([1956], reprinted in 1990) and Bob Solow (1956, 1957). Both Abramovitz and Solow highlighted that, over time, the amount of inputs required to produce a given level of output had dramatically increased (an upward shift in productivity of 2 percent per year). Simply put, they had independently discovered—or more accurately, rediscovered—the residual (Copeland 1937; Griliches 1996). Of course, the interpretation of this increase in total factor productiv- ity (TFP) was more controversial. In 1956, Solow introduced a simple and tractable neoclassical equilibrium growth model. The Solow model simply stated that the relationship between inputs and outputs at a point in time can be described as the “level”of technology; as such, the changing relation- ship between inputs and outputs can be described as “technical change.” While Solow was of course aware and recognized that technical change may itself be endogenous, the model took the growth rate in technology—A—to
- 42. Why Was Rate and Direction So Important? 29 be exogenous. As Solow describes explicitly in his 1957 paper “Technical Change and the Aggregate Production Function,”“It will be seen that I am using the term technical change as a short-hand expression for any kind of shift in the production function” (Solow 1957, 312). Importantly, Abramovitz was less sanguine. Abramovitz memorably dubbed the residual “a measure of our ignorance.” For example, in Abra- movitz’s review of Edward Denison’s 1962 book The Sources of Economic Growth and the Alternatives Before Us. Abramovitz sharply comments that “as a residual, it is the grand legatee of all the errors of estimate embodied in the measures of national product, of inputs conventional and otherwise, and of the economies of scale . . . classified under productivity growth” (Abramovitz 1990, 162). Abramovitz notes that the original estimates of the residual—with more than 85 percent of the increase in income per cap- ita unexplained—can be attributed to various sources, including changes in the intensity of work (i.e., reduction in work hours per worker), edu- cation, appropriately measured capital inputs, and changes in technol- ogy and organization. For Abramovitz, to understand the sources of growth is not simply a measurement exercise but requires an understanding of the economic forces inducing growth, including the determinants of investment toward invention, and the relationship between those forces and measured economic aggregates (Abramovitz 1990). Ultimately, to understand the role of innovation in economic growth, it was necessary to move beyond a “black box”approach and build a meaning- ful microeconomics of technical change. Dick Nelson emphasizes this point exactly in his introduction to the volume, particularly in a section entitled “The Classical Economics Approach and the Black Box.” While there had been earlier attempts to make progress—for example, a 1951 Social Science Research Council meeting at Princeton University, and the impactful publi- cations arising from Zvi Griliches doctoral dissertation, it is fair to say that the microeconomics of innovation was at that time in an embryonic state. What was missing was an economics of technical change and innovation grounded in the microeconomic, historical, and institutional environment in which invention and innovation occur. The 1962 volume was in large part the first and a particularly important salvo in that cause. Spurred by an initiative headed by Charles Hitch, then Chairman of the Economics Department at RAND, Dick Nelson brought together a group of junior and senior scholars to focus on the rate and direction of inventive activity as a key for understanding technological change as an economic problem. The volume takes an eclectic approach, with different papers of- fering different methodologies—from highly descriptive papers to system- atic measurement to theory. How, then, does it “hang together” and what factors made the volume so influential? Three distinctive areas are useful to highlight:
- 43. 30 Nathan Rosenberg and Scott Stern 1. The nature of innovation as an economic good 2. The economics of the organization of research and development orga- nizations 3. The industrial organization of innovation-intensive industries and sec- tors, with a particular focus on dynamics and evolution Each of these areas is not only a central element of the microeconomics of innovation, but also one in which the 1962 volume serves as the essential starting point (or, more accurately, the starting point after Schumpeter) for the large literature that has been spawned since that time. The Nature of Innovation As an Economic Good The 1962 volume was a milestone in articulating how the nature of inven- tions and innovations as economics goods raise fundamental issues regard- ing appropriation, indivisibility, and uncertainty. Of course, Dick had raised these issues in his seminal 1959 paper, and issues regarding the nature of ideas as economic goods were an important area of contention among clas- sical economists (see the penetrating summary and history of economic thought on the topic provided in Fritz Machlup’s 1958 report for the US Congress, “An Economic View of the Patent System”). With that said, it is useful to consider Ken’s distinctive contribution in his paper “Economic Welfare and the Allocation of Resources for Invention.” Before diving into the substance, it is perhaps useful to note that, according to Google Scholar, this is Ken’s third most highly referenced paper, with more than five thousand citations. Here is where Ken clearly articulates the disclosure problem: “there is a fundamental paradox in the determination of the demand for information; its value for the purchaser is not known until he has the information, but then he has in effect acquired it without cost.” (Arrow 1962, 615). The traditional microeconomic notion of “willingness- to-pay” is undermined when one cannot formulate a willingness-to-pay. One cannot do so prior to having information about the idea. Most impor- tantly, in the absence of enforceable intellectual property, once the potential buyer has the information that allows her to formulate a willingness-to-pay, the willingness-to-pay drops to zero. Interestingly, though Machlup mentions in his 1958 essay that “Indeed, if one always cites only the ‘fist and true inventor’ of an argument concern- ing the patent system, one will rarely be able to cite an author from the 20th century” (Machlup 1958, 22), the distinctive role for intellectual property rights in enhancing the ability to negotiate and trade inventions is noted only obliquely (under the general rubric of appropriability issues). A related contribution of the 1962 volume is the inclusion of early, per- suasive empirical studies of appropriability. For example, Enos’s careful study of invention and innovation in the petroleum refining industry offers
- 44. Why Was Rate and Direction So Important? 31 sharp, early insights into the nature of innovation (see Rosenberg 1982, 8; Enos 2002). Enos carefully emphasizes the importance of incremental pro- cess innovations, and provides reasonable estimates of the private rates of returns (which he estimates to be quite high). The volume additionally pro- vides evidence about the gap between the private and social rates of return. As Dick notes in the introduction, “A third major problem is that of exter- nal economies. Arrow, Kuznets, Machlup, Markham, Merrill, and Nelson all present argument or evidence that, given existing institutions, inventive activity generates values which cannot be captured by the inventor”(Nelson 1962, 14). Indeed, Arrow draws out these implications clearly in terms of the economywide incentives for research: “we expect a free enterprise economy to underinvest in innovation and research . . . because it is risky, because the product can be appropriated to only a limited extent, and because of increasing returns in use” (Arrow 1962, 619). This simple statement has certainly kept us busy. By focusing on appropriability, the volume contrasts sharply with the treatment of innovation within the neoclassical growth literature. Not con- tent to treat innovation as an exogenous feature of the economic environ- ment, the papers in the volume suggest that the impact of innovation on the aggregate production function depends inherently on the microeconomic and institutional environment. For example, if a principal mechanism of appropriation is through embedding ideas into capital goods (which are protected by patent and sold at a premium), these innovations will be mea- sured as increases in the value of the capital stock; in contrast, if the same idea is diffused for free in a perfectly competitive setting, the increase in labor productivity will be attributed to technical change. To understand the impact of innovation on economic growth, one must first understand the nature of innovation, and this requires a microeconomic orientation. The Organization of Research and Development Organizations Second, the 1962 volume is the first real collection of serious studies (in one place) that focuses on the economics of R&D organizations. Several studies in the volume highlight the distinctive ways that invention and inno- vation are managed, from the subtle structure of incentives to the develop- ment of infrastructure that communicates complex technical ideas across large organizations. Consider Dick’s wonderful study of the development of the transistor at Bell Laboratories. The case study is unusually careful, and gives a real sense of how the scientific insight—the transistor effect—resulted in the technological innovation that we have come to know as the transistor. Dick carefully discusses the motives of the scientists, of Bell, and explains how the research project was organized. He presciently highlights key aspects of the research process that have only recently come to be appreciated: the
- 45. 32 Nathan Rosenberg and Scott Stern role of freedom on the part of scientists, the role of research teams in crea- tivity, and the impact of private versus public funding on both the rate and direction of research. Perhaps most notably, Dick clearly—and perhaps for the first time— articulates the dual nature of research. Dick emphasizes the fact that a single research program may simultaneously be of fundamental scientific interest (particularly from the perspective of the researchers) yet be associated with immediate and impactful commercial application (particularly from the perspective of the private research funder). He comments: “I have a feel- ing that duality of interests and results is far from unusual. I wonder how many scientists—university scientists—doing basic research do not think now and then about the possible practical applications of their work. . . . I have the feeling that many scientists in industrial research laboratories . . . are . . . internally torn about the dual nature of the research work” (Nelson 1962, 582). Of course, the dual nature of research has been at the heart of the economics of science and technology for the past half century. Nelson’s case study of the transistor is but one of seven or eight essays that begin to unpack the economics of research and development organizations. These include specific case studies of invention and innovation in the alu- minum industry (Peck), the petroleum industry (Enos), DuPont (Mueller), and Bell Labs (Marschak and Nelson). These studies elucidate the impact of alternative incentive systems (e.g., whether to reward individual inven- tors for their discoveries), the flow of technology and knowledge within and across organizational boundaries (e.g., by examining the ultimate origin of the inventions that were ultimately impactful at companies such as DuPont), and distinctive mechanisms for appropriability, including speed, secrecy, and formal tools such as patents. As well, the volume includes several essays emphasizing the importance of human capital and the motivation and supply of inventors, scientists, and engineers. Kuznets of course emphasized the role of education and the application of specialized researchers in his work (and also recognized the difficulties of inferring the output of innovation simply by measuring the input into innovation). Also, several papers highlight the distinctive nature of the human capital required for innovation: a preference for autonomy and freedom combined with the need to invest in specialized training at the early stages of the career. From the perspective of the economics literature, few if any detailed case studies of the organization of research prior to this time continue to moti- vate theoretical and empirical research. The 1962 volume includes half a dozen, and ultimately motivated the type of systematic research seen in the work of David Mowery, Wes Cohen, and others. By bringing together a collection of careful case studies grounded in the phenomena yet atten- tive to economic theory, the volume offered a path for understanding the
- 46. Why Was Rate and Direction So Important? 33 subtle interrelationship between the inventive process and the organization of R&D activities. Innovation and the Dynamics of Industrial Organization Finally, the 1962 volume is the beginning of serious industrial organiza- tion studies of strategy and innovation incentives. Notably, the section of Ken’s paper entitled “Competition, Monopoly and the Incentive to Inno- vate” is perhaps the first important model of a nonobvious strategic effect regarding the incentives for innovative investment, and spawned the entire “patent racing” literature. Perhaps more saliently, the Arrow replacement effect serves as a powerful foundation for our modern understanding of Schumpeterian competition, and is present in the work of Aghion, Scotch- mer, Segal and Whinston, and others. More generally, the volume suggests that innovation incentives and the consequences of innovation are shaped by the microeconomic conditions of the product market. From the role of demand (as emphasized by Schmook- ler) to the potential for detailed strategic interaction (see Peck’s detailed discussion of the market structure and innovation relationship in the alu- minum industry), the 1962 volume highlighted the idea that the causes and consequences of innovation are grounded in the strategic environment in which firms and researchers operate. Concluding Thoughts Ultimately, the 1962 volume was among the first—and by far the most influential—volume that pointed economists toward the underlying phe- nomena of inventive activity and innovation as economic processes. The papers became the starting point for a microeconomic approach and lines of inquiry that have continued to this day—identifying the distinctive facets of information goods and knowledge, understanding how different research organizations are organized, and understanding the dynamic and evolution- ary relationship between innovation and industrial organization. A significant contributor to the volume’s impact was its combination of detailed and concrete examples—the aluminum industry, the steel industry, Bell Labs, and so forth—with systematic measurement exercises and theo- retical modeling. It is perhaps not too surprising that, by focusing a group of first-rate economists on the problems of invention and innovation, a great deal of progress was made. Less obvious was the impact of placing the microeconomics of innovation at center stage. The volume ended up offering a constructive and ultimately quite powerful counterpoint to a more aggregate and linear view of inno- vation. By rendering invention as an endogenous process, one is forced to
- 47. 34 Nathan Rosenberg and Scott Stern understand the historical context and institutional structures that motivate and facilitate the process of innovation. It is only then that the link between technological change and economic growth can be made. Looking back at the volume, it should come as no surprise that the key elements of endog- enous growth theory as developed over the past two decades are the increas- ing returns to knowledge production, the impact of limited appropriability, and imperfect competition. Perhaps more broadly, the volume and follow-on work have raised as many questions as they have settled. We are still involved in significant debates about the appropriate ways to fund research and development activi- ties, the contribution of science and innovation to economic growth, and the endogenous nature of science and technological change. This anniversary conference aims to address some of questions in new ways. We look forward to that. References Abramovitz, M. (1989) 1990. Thinking About Growth. Cambridge: Cambridge Uni- versity Press. Arrow, K. J. 1962. “Economic Welfare and the Allocation of Resources for Inven- tion.” In The Rate and Direction of Inventive Activity, edited by R. R. Nelson, 609–26. Princeton, NJ: Princeton University Press. Copeland, A. 1937. “Concepts of National Income.” In Studies in Income and Wealth. Vol. 1, edited by the Conference on Research in Income and Wealth, 2–63. New York: National Bureau of Economic Research. Enos, J. 2002. Technical Progress and Profits: Process Improvements in Petroleum Refining. Oxford: Oxford Institute for Energy Studies. Griliches, Z. 1996. “The Discovery of the Residual: An Historical Note.”Journal of Economic Literature 34 (3): 1324–30. Machlup, F. 1958. “An Economic Review of the Patent System.” Washington, DC: United States Government Printing Office. Nelson, R. R. 1962. “Introduction.”In The Rate and Direction of Inventive Activity, edited by R. R. Nelson, 1–16. Princeton, NJ: Princeton University Press. Rosenberg, N. 1982. Inside the Black Box: Technology and Economics. Cambridge: Cambridge University Press. Solow, R. 1956. “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics 70 (1): 65–94. ———. 1957. “Technical Change and the Aggregate Production Function.”Review of Economics and Statistics 39 (3): 312–20.
- 48. 35 Some Features of Research by Economists on Technological Change Foreshadowed by The Rate and Direction of Inventive Activity Richard R. Nelson The community of scholars studying technological change now draws from many disciplines. However, almost all of those participating at the 2010 National Bureau of Economic Research (NBER) conference whose proceedings are presented in this volume were economists by training. My observations here are mostly about economists who have been studying tech- nological change. The basic points I want to make are first, that one can see foreshadowed in the papers presented and discussed at the old Conference on The Rate and Direction of Inventive Activity that this conference com- memorates many of the directions and characteristics of the research on invention, and technological advance more generally, that has been done by economists since that time. And second, one can also see some of the difficulties and tensions that have marked this field in economics. The essays by economists at the old conference are nearly unanimous in proposing the usefulness of the broad perspective provided by traditional economic analysis for research on inventive activity. They argued persua- sively that inventors and organizations employing them are purposeful, and in a wide range of cases an important objective is profit. Their essays pro- vided strong support for the proposition that the allocation of inventive effort is influenced by perceptions of where technically successful inventions will find a strong demand, and also by considerations of technical feasibility and the likely cost and time of achieving an advance. Much of the work on technological advance by economists since that time has been based on, and provided more evidence supporting, this perspective. Richard R. Nelson is the George Blumenthal Professor of International and Public Affairs Emeritus at Columbia University and Director of the Program on Science, Technology, and Global Development at the Columbia Earth Institute.
- 49. 36 Richard R. Nelson However, the essays and discussion also display an uneasiness about treat- ing invention as an activity in which the actors optimized in any nonso- phistical sense of that term. The uncertainties involved in the process, the high failure rate, and the creativity often shown in both successes and fail- ures, seemed to call for another way of characterizing their behavior. Also, while not discussed explicitly, recognition of the dynamics of competition in industries where innovation was important, and the continuing turnover of firms in such industries, clearly raised questions about the relevance of equilibrium concepts in analysis of technological advance. Several of the essays highlighted that a good share of the relevant activity needed to be understood as proceeding in contexts where profit was not the dominant objective. More generally, the participants at the conference recognized that inventing had properties that differed strongly from the standard productive activity depicted in the economics textbooks, and that an invention was not a standard commodity. A number of the participants clearly believed that there was a need for the development of theory tailored to the particularities of technological change. As I suggested earlier, several of the essays and much of the discussion stressed the importance of uncertainty in the inventive process, and the fact that many efforts ended in failure. It was highlighted that, while individual inventors often had great confidence in their ideas, there generally were sig- nificant differences in how different inventors and firms laid their bets, and it was very difficult to predict in advance who would be the winners and los- ers. The idea that it was highly desirable to run parallel efforts was put forth in several of the papers, and several commentators observed that this is an important feature of market competition. I noted then that this certainly is not a feature of market competition highlighted in the standard economics text books. There also was considerable discussion of the issue of how inventors were able to appropriate returns from their successful inventions. Several of the authors pointed out that inventions were new ways of doing things that not only were “nonrivalrous in use” but also often easily imitable, if they were not protected in some way. The threat of rapid imitation was flagged by Arrow and others as a deterrent to private inventing. However, it was also recognized that the total social gains from new technology were enhanced when the know-how went public, and that sooner or later most technology gets into the public domain. There clearly are some important issues here not treated or even recognized in standard microeconomic theory. As I looked again at the essays, and tapped my memory of the conference discussion, it is interesting that explicit reference to Schumpeter is quite lim- ited. Where there was such reference, it mostly was in discussion concerned with whether significant innovation in an industry required that the firms in it be large ones. However, as I noted previously, a Schumpeterian view
- 50. Research on Technological Change Foreshadowed by Rate and Direction 37 that innovation is the principal means of competition in many industries is implicit in several of the papers. This perspective on the nature of competi- tion diverges radically from the view in standard microeconomics. In addition, there was widespread recognition that much more than the market system was involved in supporting and orienting inventive activity. It was proposed that in many sectors inventive activity drew heavily from science that was undertaken largely at universities. In addition to supporting muchof thebasicresearchdoneintheUnitedStates,governmentalsoplayed a major role in funding and directing applied research and development in several important fields. Thus it was apparent to many of the participants at the conference that effective analysis of technological advance would require a conceptual structure that encompassed a wider set of institutions and activities than were treated in the standard economic textbooks. I also want to note here the apparent caution on the part of the schol- ars who were concerned with somehow measuring invention regarding the possibility of getting good quantitative measures. The various quantitative variables being discussed, and used in an exploratory way, generally were recognized as indicators of the phenomena being addressed, rather than being good measures of it. This was very much the case regarding the use of total factor productivity growth as a measure of the rate of technological advance, of patent numbers to indicate where and how much inventing was going on, and R and D numbers to “measure” inputs to inventing. It is clear that many of the papers that attracted the most interest were detailed qualitative case studies, or analyses based on a collection of care- fully detailed case studies. These were the studies that seemed to many of us to provide the most illumination regarding what inventive activity was all about. While I did not recognize it at the time, with the advantage of hindsight one can see that this combination of features was going to make it difficult for empirically oriented study of technological advance to become fully conformable with the more general research orientation that the economics discipline increasingly was establishing as the norm. The theory of economic behavior that was coming to be treated as standard by the profession had apparent limitations as a way of orienting or interpreting research in this arena; thus, at least some of the research done by economists working in this field was going to proceed outside of this theoretical frame. The numbers that could be used in quantitative analysis had serious limitations as mea- sures of the important variables and, therefore, much of our understanding of what is going on had to be qualitative, with numbers playing a useful role as indicators rather than accurate measures. However, since the time of the Rate and Direction Conference, the economics profession and the journals serving it have become less receptive to qualitative empirical stud- ies. And the nature of the subject matter clearly called for an interdisciplin-
- 51. 38 Richard R. Nelson ary approach to some of the key questions. Yet, economics as a general discipline was becoming increasingly separate from the other social and behavioral sciences. In any case, the conference should be understood as part and parcel of a significant increase in interest by economists in technological advance that was occurring then in economics. Beginning around 1960, there was a burgeoning of research in this field. That research has been quite varied in the questions explored, in the methodologies employed, and in the auspices of the research. Much of the research has been done by economists who have had their home in eco- nomics departments. A significant amount has been done by economists with appointments in business schools, some of that research on the topics economists in economics departments have been writing about, but some of it concerned with how firms develop the technological capabilities that they possess and the factors behind firm differences. Much of this research has been empirical and quantitative. Here I would like to specially recog- nize the work of the giants Jacob Schmookler, Edwin Mansfield, and Zvi Griliches. Nathan Rosenberg has done remarkable work on the history of technology. Some of the work has involved survey research. The NBER has been a sponsor and organizer of much of it. Much of it has been published in the regular economics journals. However, a considerable amount of research in this broad field has been done by economists working in new research and teaching institutions, specifically oriented to the study of technological change, usually, but not always, oriented by a focus on issues of science and technology policy. The research done at the Science Policy Research Unit at the University of Sussex has made an especially important contribution to our understanding of how technological advance occurs. I note that these institutions, while provid- ing a home for many economists studying technological advance, have had a definite interdisciplinary orientation. New journals like Research Policy, and The Journal of Evolutionary Economics, and Industrial and Corporate Change, have grown up around this intellectual community. Here I would like to specially recognize Keith Pavitt and Christopher Freeman as making enormous contributions to our understanding. What are the major understandings that, as a result of this research, we now have that were not available to the scholars who participated in the Conference on the Rate and Direction? The discussion that follows obvi- ously reflects my own judgments regarding what is important. First of all, some of the arguments that might have been controversial at the time of the conference have been amply firmed up. There is no informed arguing now against the proposition that technological advance is the prin- cipal source of long-run productivity growth. We also now have much stron- ger evidence that, with few exceptions, industries where measured produc- tivity growth and technological advance are great are characterized by high
- 52. Research on Technological Change Foreshadowed by Rate and Direction 39 R and D intensity, or high R and D intensity of some of their upstream supplying industries, or both. The important influence of perceptions of profit opportunities in motivating and orienting inventive effort also has been amply confirmed. But second, we now are much more conscious that there are very great differences across industries in their rates of technological advance. While this cross industry variability clearly is related to differences in R and D intensity, scholars are still struggling with the reason for these differences. My belief is that one important factor is differences in the strength of the underlying sciences on which industrial R and D draws in different indus- tries. Third, it is now much better understood that much of scientific research is in fields, like electrical engineering, computer science, and oncology, where practical problems and objectives play a nontrivial role in orienting effort. That is, different fields of science are specifically oriented to helping the advance of different technologies. We have come a long way from earlier beliefs, implicit in a number of the old Rate and Direction Conference es- says, that the technological payoffs from basic research are largely a matter of serendipity. On the other hand, the uncertainties about the particular applications of new scientific knowledge, which was a matter stressed by several authors at that conference, have been amply confirmed. Fourth, our understanding has improved greatly regarding the means by which inventors and firms appropriate returns from the new products and processes they create. It now is recognized much more clearly than it was at the time of the conference that patents are only one of the means, and that they play a major role in only a few technologies. Many inven- tions are much more costly and time consuming to imitate than economists earlier believed, and in many technologies the advantage of a head start, particularly if complemented by rapid subsequent improvement of the ini- tial invention, is the principal source of return to inventing and R and D. We also know now that the principal means of appropriation differ across technologies and industries. Fifth, a lot has been learned about Schumpeterian competition in indus- tries where innovation is important, and about the dynamics of industrial structure under these conditions. The old argument about whether large firms with considerable market power were necessary for there to be signifi- cant innovation in an industry has more or less been replaced by an under- standing of the differences in the roles played by new firms and established firms at different times in the history of a technology. A significant body of empirical research and modeling of industrial dynamics has been structured by the conception of a technology life cycle. Differences in industry structure associated with this and other factors have been more clearly recognized. I note that several of these understandings highlight major differences across technologies and industries. This suggests strongly that it is a mis-
- 53. 40 Richard R. Nelson take to argue in general about things like the role of university research, the importance of patents, or the importance of new firms in the innovation pro- cess, because these variables differ significantly across fields and economic sectors. I believe that many in the economics community have been slow in recognizing this. I turn now to two matters that I and my working colleagues think we have learned, but are certainly controversial. First of all, a significant num- ber of economists and other empirically oriented scholars of technological advance have come to propose that the process should be understood as evolutionary. The uncertainty involved in inventive activity leads to a diver- sity of efforts going on at any time to advance a technology, that are in com- petition with each other and with established technology. The winners and losers are determined to a considerable degree through actual comparison in use. And the results of today’s competition and what has been learned today provide the context for the continuation of the competition tomor- row. This broad theoretical frame has provided the basis for a considerable amount of modeling, and also the orientation for a wide range of empirical research on technological change. Second, a number of economists studying the subject empirically have come to the judgment that it is not helpful to view the institutional structure supporting innovation as essentially market organization, with nonmarket elements including public programs coming into the picture when markets fail, which is a point of view implicit in much of the main line economic writ- ing. A considerable amount has been learned about the roles of nonmarket actors, particularly universities, since the days of the Conference on the Rate and Direction. For many scholars that have done that work it seems bizarre to propose that universities do what they do because of market failure. We also know much more now about the government programs, including pro- grams of R and D support, that are important in many economic sectors, and many of these too, like those involved in defense contracting, seem not to be adequately rationalized in terms of responses to market failure. Several economists have developed the concept of an “innovation system” to characterize the range of different actors involved in the advancement of technology and the different roles they play. These propositions about how technology advances and the range of actors involved in the process clearly are very different from the picture presented in today’s standard economics textbooks (for example, in their treatment of growth theory). The divergence here testifies to the fact that the intellectual tensions I proposed were visible at the conference fifty years ago are very much evident today. In any case, I suspect that while many of the readers of this essay are familiar with a number of the propositions I have just put forth, few are familiar with all. That is because different ones stem from the research of different groups of scholars, and unfortunately there is little cross-group
- 54. Research on Technological Change Foreshadowed by Rate and Direction 41 communication. There are, first of all, economists relatively closely con- nected with the main line of the discipline. The NBER affiliates working on technological change are mostly in this camp. Economic historians in economics departments have also made significant contributions, but lately this group has been dwindling. There are, second, economists affiliated with research institutes dedicated to the study of issues of science and technology policy and of technological advance more broadly, and taking a transdisci- plinary approach to the subject. Here, as I noted earlier, the research done by scholars at SPRU has been particularly important, but in recent years a number of other such institutions have become important loci of research. In my view, while there is some overlap, for some time economists work- ing in this area have been divided into two roughly separate camps each associated with different ways of dealing with the tensions that I suggested were visible at the Conference on the Rate and Direction. Economists in the first camp have stayed mainly within the confines of the discipline. They have accommodated to the tensions largely by being quantitative and empiri- cal, and while urging caution about their numbers have tended to shun do- ing detailed qualitative case studies. They have been commonsensical in the theory they use and articulate in their work, while shying away from saying explicitly that the microeconomic theory of the textbooks does not work very well with the subject matter they are addressing. Economists in the second camp have embraced the need to do detailed qualitative research and see quantitative data in the light of more qualita- tive understanding. They also have been more vocal in pointing out the inadequacies of standard microeconomics as a frame for understanding what is going on, and more active in entertaining and developing theory they think better suited to the subject matter. They have been active in devel- oping a theory of the firm that is oriented to dynamic capabilities, and a neo-Schumpeterian theory of competition in industries where innovation is important that generates industrial dynamics. The development of evolu- tionary theory has largely been within this camp. They are comfortable with concepts like that of an innovation system that aims to encompass nonmar- ket as well as market actors in the process of technological advance. Some economists have been able to bridge the divide, and act and think as members of both camps. But the divide clearly is there. Since the participants and presentations at the 2010 conference were largely those of the first camp, there was little opportunity for cross-group communication. However, we scholars of technological advance would benefit from more of it.
- 55. Random documents with unrelated content Scribd suggests to you:
- 56. § 6 Violet Rawlings, sprightly as ever, even more fluffily dressed than usual; and her husband Hubert, determined that ninety-six hours of personal suggestion should at last secure him some part of the Nirvana advertising account, arrived in time for lunch next day. The foxy-faced publicity agent lost no time in opening his campaign. “We went to the Palace last night,” he began, almost before they had sat down to their meal. “On our way home I noticed that your new sign in Piccadilly wasn’t burning properly.” “Really,” said Peter stiffly. “Lobster mayonnaise, or some of these cold eggs?” asked Patricia, hoping to turn their conversation. But her brother-in-law took no notice. “I’m somewhat of an expert on signs,” he continued. “And, frankly, I don’t think they have much selling value on a high-grade article like yours. I pin my faith to full pages in the six-penny weeklies. And of course, Punch. Although Punch is a humorous paper. . . .” “I beg your pardon,” interrupted Francis. “I said—although Punch is a humorous paper.” Francis, feeling satire useless with a creature of this type, gave up the struggle. Hubert accepted an egg, as less liable than lobster to impede talk; and continued his harangue. Peter, who knew that Rawlings, despite his personal unpleasantness, possessed knowledge, listened interestedly—asking a question every now and then. The others started a conversation on their own. Said Violet, monopolizing it, “Oh but we never leave London while the ‘House’ is sitting. I think politics so interesting, Mr. Gordon. Don’t you? Though I suppose as an author—so clever, that last poem of yours—you take more interest in the affairs of the heart.” She ruffled herself; rattled on. “But of course, politics are the thing nowadays. I’m afraid”—her voice dropped to the confidential whisper of the person who has no
- 57. news to impart—“we’re going to have trouble. Not with Servia, of course: but in Ireland. People are saying. . . .” “Amazing,” thought Francis, “how a nice woman like Pat. can have such a sister.” Smith, bringing the joint, interrupted the Rawlings duo in their monologues. “I always wonder,” went on Hubert a few minutes later, “why you didn’t take your brother into partnership. He seemed an awfully nice fellow, the only time I met him.” “Arthur?” queried Peter. “Why, Arthur wouldn’t take a partnership in Rothschilds! He ran away from school when he was fifteen; and he’s been running from somewhere or other ever since. The last time I heard from him, he was in the Dutch Indies—planting. Wrote to ask my opinion about tobacco prospects in Java. Beastly stuff, Javanese tobacco; though they use a lot of it for making so-called Borneo cigars.” Luncheon over, Peter and Patricia challenged the two men at tennis: Violet, languid in a long chair, alternately watched the match; and picked her way expertly through The Tatler. To see her own photograph in that periodical, not once but regularly, was a small part of Violet’s many unrealized ambitions: which included a knighthood and a seat in the House of Commons for her husband, a Rolls-Royce limousine (painted black and white for preference) for herself, and all the usual appurtenances of the politico-parisitical set which both of them alternatively aped and envied. Neither she nor her husband belonged to the class who “didn’t want anything in particular”! Peter, playing brilliantly at the net, and Patricia, backing him up accurately from the base-line, defeated their opponents in three straight setts. Followed tea, a languid paddle towards Shiplake, the dressing-gong, stiff shirts and low frocks, auction bridge. . . . July the Thirty-first, Nineteen Hundred and Fourteen! And yet, not one of those fairly well-informed five dreamed the False Peace actually at an end. Already, the Beasts in Gray,—murder, rape and plunder in their swinish eyes,—were abroad. Already the Crime, so long premeditated, had been committed. Even as these four sat at
- 58. their game, less than fifty miles away from them, up in London, the womanizers and the wine-bibbers of Westminster were scuttling hither and thither, incredulous, anxious to compromise, fearful. The scum which had floated to the surface! They trembled now, those false guardians. For they and they alone in all England feared the Beast. But more than the Beast, they feared their own People;— knowing them not, neither their strength, nor their courage, nor their infinite forgiveness. But already (one man’s work!), silent, forethoughted, utterly equipped, the People of the Sea were wheeling to their battle- stations. Already, Anglo-Saxondom had flung its first bulwark across the world. It was the commencement of the Great Cleansing!
- 59. PART FOUR CRISIS
- 60. § 1 To comprehend the deliberate sacrifice which Peter Jameson made for the cause of humanity, it is essential that you should realize both the man and the offering he brought. It was not, primarily, the sacrifice of money, but the giving-up of a great ambition. For money, regarded purely as the purchase price of material comfort, he cared very little. As a spender, he had small sympathy with the exotic luxury of his time. His amusements were essentially simple—a gun, a trout-rod, a horse, a good glass of wine. All these, he might have possessed without working. But Peter had been picked up, while still a boy, into the fascinating game of business; and in that game he had found both work (which was vital to his temperament) and enjoyment. His personal qualities—resoluteness, concentration on the immediate job, a certain creative instinct, clear thinking, moral courage and a controlled imagination—fitted him eminently for the sport of commerce. Nirvana Limited, which would have been to the average individual merely a machine for the making of an income, represented to Peter Jameson—at the outbreak of war—the ultimate aim in life. He loved that business, not only for the sake of what it might eventually bring him, but for itself. He loved it, like a good gardener loves his garden, as much for the labour as for the result. He had seen it grow, in six years, from starved plant to a goodly tree—fruit almost ripe for the plucking. He felled that tree deliberately, in cold blood, under no compulsion save that of his own soul. And he waved no flags to console him for the felling! For the man was, despite the admixture of Miraflores strain, an Anglo-Saxon: responded—though he knew it not—to the blind spirit of that race which came out of Italy through France, welded itself to dour Saxon and berserk Viking, and so spread, fighting always but always fighting as an ultimate issue for Independence, to Virginia and Quebec, to the Falkland Islands and the Hebrides, to South
- 61. Africa and Australasia; till it became—scarcely conscious of its own oneness—the final arbiter in the great world-struggle of Decency against the filthy doctrines of the Beasts in Gray. And behind the man, equally resolute, equally blind to the spirit which moved her, stood Patricia, the Anglo-Saxon woman— thoroughbred, unflinching.
- 62. § 2 England’s declaration of war did not make Peter Jameson “burn to avenge gallant little Belgium,” or eager, in the phraseology of the period, “to do his bit.” His commercial position was too damned awkward for the indulgence of any such sentiments. He left Wargrave at ten o’clock on the morning of August the fifth; and reached the outskirts of London in forty-five minutes. Then he gave the wheel to Murray, and began to think. Throughout, his hand had been perfectly steady at the throttle, his foot firm on the accelerator. Their speed had averaged forty miles an hour. Behind him, in the tonneau, sat Francis Gordon, acting as always on inspiration rather than reason, decision already reached. Francis Gordon talked to himself, under his breath: first in Dutch and then in German. He was testing, not his knowledge of those languages, but his accent. “Ich kann es tun. Ich bin einer der einzigen die es tun konnen,” he muttered. Then he began to recite, very slowly and almost inaudibly, the first speech from Schiller’s Republican Tragedy: Leonora. “Nichts mehr. Nichts mehr. Kein Wort mehr. Es ist am Tag.”[1] Peter was not talking to himself; had reached no decision. His brain went over the salient facts of the situation; weighing them up. Discarding details. Selecting essentials. The Jameson-Beckmann problem must wait. How would Nirvana be affected? Home-trade, for the moment at any rate, would collapse. The export-business might hold up. Might. Probably wouldn’t. Remained the fact that if the worst came to the worst he stood to loose seventeen thousand pounds. . . . After all, people must smoke. Wars didn’t last for ever. Could he see the thing through? Financially? . . . “London & Joint Stock Bank, Pall Mall,” he said to the chauffeur. They swirled through Piccadilly; nipped round past the Ritz; slowed down St. James’ Street; and pulled up.
- 63. “Afraid I can’t lend you the car, old man,” said Peter. “I shall want it all day. Are you coming down again to-night?” “No,” answered Francis. “Prout’s bringing up my things on the afternoon train.” He stepped out of the tonneau; brushed himself carefully; and walked off down Pall Mall. Peter, telling Murray to wait, climbed the flat steps to the glass doors of the Bank. They were closed: but his knock brought a commissionaire, who recognized him; opened them. “No business today, sir,” said the commissionaire. “Manager in?” asked Peter. “Yes, sir.” “Ask him if he’ll see me.” The Bank, always quiet, seemed—that morning—like a tomb. Clerks bent over their ledgers; lights burned: but no customers waited at the iron-grilled counters, no sovereigns clinked in the brass shovels. “Step this way, sir,” said the commissionaire. Peter followed him across the stone floor, through the glass doorway into the manager’s parlour—soft-carpeted, lavishly furnished with dark mahogany and saddle-bag chairs. Mr. Davis, the branch-manager, was a gray-bearded man with the clothes of a prince and the manners of a diplomat. As a West End Branch, “Pall Mall” did not seek mercantile business. They had taken the Nirvana account, officially, “to oblige their old client Mr. Jameson, whose private account they had handled for so many years.” This courtesy had not gone as far as a reduction in their usual rates of interest! “Good morning, Mr. Jameson. I half expected you.” Mr. Davis rose; shook hands. “Won’t you take a seat?” “Thanks. I came to ask you about the financial position. This war, you know. The papers talk about a moratorium. I understand that to mean a suspension of credit. . . .” “Only in extreme cases, Mr. Jameson. Only in extreme cases. Of course, we are not desirous, at the moment, of increasing facilities. We are, if I may use the expression, sitting on the fence. But my directors—I have a letter from them before me now—are anxious for
- 64. me to impress on all our clients, that they do not anticipate any financial crisis. Measures, as I am given to believe, have been taken; temporary expedients adopted; by which. . . .” He went on to explain them, at some length. “Then I take it,” said Peter, “that on the resumption of banking- business. . . .” “Matters will be exactly as they were a week ago.” Mr. Davis rose again, shook hands, made his point courteously. “Naturally, Mr. Jameson, as Nirvana Limited will not be under the necessity of making payments, they will not require any addition to the overdraft which you have guaranteed for them.” “Of course not,” said Peter. The interview had turned out according to anticipation. If Nirvana wanted any more money, it would have to be found in cash. He stood for a moment on the steps of the Bank. London had not altered in a night. The straight aristocratic thoroughfare seemed a little busier than usual. That was all. Then he looked for the gaudy sentries outside Marlborough House; saw that they were in khaki! “The factory, please, Murray; and as fast as you can,” said our Mr. Jameson. . . . [1] “No more. No more. Not a word more. It is the Day.”
- 65. § 3 To describe “Pretty” Bramson as nervous, would be a gross understatement. The man was scared stiff; had been for two days. Peter found him wandering about the half-empty building—(the English workman does not usually put in an appearance till twenty- four hours after “Bank Holiday”)—damp cigarette between his lips, white about the gills, alternatively fidgeting and depressed. The famous black moustaches were distinctly out of curl: the brilliantined hair lacked its usual polish. “Morning, Bramson. You look rather out of sorts.” Bramson led melancholy way into the private office. “It’s all U P with us now,” he said. “We’re ruined. That’s about the long and short of it.” “Rats!” snapped Peter, lighting a cigar. “The Bank will be down on us for that overdraft. . . .” “Don’t be a fool. To begin with, they can’t call in any loans. There’s a moratorium. Secondly, if they do want their money, I can pay it. Do you really think I guarantee liabilities I can’t meet?” “I hadn’t thought of the moratorium,” began Bramson, plucking up courage. Peter, puffing slowly at his cigar, got over the flash of temper. “Worried about that thousand of yours?” he queried suddenly. “No-o. Not exactly. But. . . .” “You are worried. Of course you’re worried. So am I. So’s everybody else. Let me remind you that I’ve got twelve thousand pounds in the concern, in addition to that confounded overdraft. But we shan’t either of us save our money by worrying. For goodness’ sake, pull yourself together, man. Let’s have a look at last month’s figures. . . .” Bramson went to the safe; opened it; took out some papers “Get a pencil,” said Peter, “and write down what I tell you. . . . Ready. . . . Right. . . . Now then: Assets . . .” He dictated steadily; picking out the amounts from the big type-written statement. “Liabilities. . . .”
- 66. The dictation continued. “That’s the lot, I think. Add them up please.” Bramson read out the figures: “Assets £27,862, Liabilities, including overdraft, £22,396.” “Which means,” commented Peter, “that your thousand and my twelve are worth—about five between them. Roughly forty cents on the dollar. If we could sell the factory as a going concern.” “You haven’t taken anything for the good-will of the business,” put in Bramson. “Of course I haven’t. That’s the whole question. Up to the end of last month, we were making profits. That was why you bought Turkovitch’s shares, wasn’t it? Do you think we’re going to make a profit this month?” “We might.” “Forget it,” said Peter genially. “The best we can hope for is to nurse the show through this damned war—if it doesn’t last too long. Now listen to me. . . .” He plunged into details, giving his orders succinctly. This must go: that be curtailed. Publicity account, selling expenses, manufacturing charges, clerical work—Peter dealt with each seriatim, hardly referring to the figures on the table. “As for the finance,” he concluded, “I’ll deal with that myself. But mind you, the whole thing’s a gamble . . . Play poker, Bramson?” he asked suddenly. “Occasionally.” “Well, if you ever put up your last table-stake to bluff the jack-pot on a busted flush—you’ll understand the present position of Nirvana Limited.” Two minutes later the car was purring Citywards.
- 67. § 4 Passing over London Bridge, through Gracechurch Street and Fenchurch Street, Peter saw that the City had in no wise altered. The same drays, motor-omnibuses, taxicabs and motor-cars fought their way through its streets. The same bareheaded clerks hurried along its pavements. The same hawkers proffered the same wares. Only the closed doors of the banking-houses portended the unusual. In his own office at Lime Street nothing spoke of world-crisis. Parkins still sat at the enquiry desk. Old George was still dusting cigar boxes. Miss Macpherson’s typewriter clicked and tinkled from the clerks’ office beyond the stock-rooms. Simpson, just back from his chop at “The George and Vulture” showed no signs of depression. He, too, had interviewed his bank manager. “And what did Smollett say about Beckmann’s bills?” asked Peter. “It looks as though we shall have to meet them after the moratorium,” said Simpson. “You see they’ve been discounted through an English bank. As far as I can make out, Beckmann’s aren’t technically Germans at all. The firm’s domiciled in a neutral country—so Smollett says. . . .” “Do you mean to say we shall be allowed to go on importing the brand?” “I don’t see why not,” said Simpson. That there could be any patriotic reasons for not trading with Beckmanns, did not strike them. The war was not yet twenty-four hours old; and neither the obtuse Simpson nor the concentrated Peter had realized it as more than a disturber of business. “Elkins and Beresford will be sure to try and use this to prejudice customers against the brand,” suggested Peter. “Let them.” Somehow, the crisis seemed to have nerved Simpson. Peter never remembered him so decided. “We must go slow,” was his verdict. “Of course trade will absolutely disappear for the first week or so. Then it’ll begin to pick up again. There’ll be no difficulty about supplies. Whatever happens
- 68. on land, our Navy’s got the Germans beaten at sea. Go slow, and keep our resources liquid—that’s my idea. . . . By the way, how about that factory of yours?” Peter hesitated a moment—Simpson had always been rather hostile about Nirvana—then said, “I’ve been up there this morning. Bramson’s rather rattled. We shall have to go slow there too. It’s a pity the brand couldn’t have had another two years’ hard advertising before this happened. As it is—everything depends on how long the war lasts. If it goes on more than six months, I may have to find a partner. That means parting with a big slice of my shares. You see, I don’t feel I ought to take any more of my capital out of this business.” “No. I agree with you there. Though if it became absolutely necessary. . . . By the way, you won’t mind my saying so, but I never understood why you took on ‘Pretty’ Bramson. He hasn’t got a very good reputation in the trade. And then his cousin Marcus being a competitor. . . .” “Oh, he’s not a bad little chap.” Peter, like all good men of business, was over-loyal to his staff. “The only trouble is that he hasn’t got much guts. But he’s all right as long as you keep an eye on him. . . . Good Lord, it’s nearly three o’clock, and that poor devil of a chauffeur of mine hasn’t had his lunch yet.” “Had any yourself?” asked Simpson. It was the one detail of the day which our Mr. Jameson had forgotten!
- 69. § 5 “And are we quite ruined?” chaffed Patricia as they finished dinner the same evening. Prout and the Rawlings had taken the afternoon train to town, leaving her lonely and—to tell the truth— more than a little worried. “Not quite, old thing,” retorted Peter. . . . But that night, for the first time in years, he woke up suddenly; saw her sleeping peacefuly in the white bedstead next his own—and realized that his responsibilities were not exclusively confined to the financing of Nirvana Limited.
- 71. § 1 Passed the first week—a week of rumours and counter-rumours, barren of certainty. Mealy-souled politicians,—protected by a Navy they had done their best to weaken—gabbled high words of hope. The few trained men, laughed at for years, departed silently about their business: the half-trained set themselves to learn. For already, the spirit of the English-speaking Peoples was astir. Slumbering, the spirit awoke: a blind spirit, conscious only of resentment, of independence mysteriously threatened, of Something Wrong in the world: finding its quaint vent in shibboleth phrases, in deep drinkings, in wagging of flags: but growing, growing always, not to be denied. Already, through the domino-cafés of London, at the long bar in the English Club at Shanghai, in dank bungalows of the Malay Peninsula, on Canadian ranches and Australian “stations,” there ran the Word: “I think I ought to go, old boy. Well, mate, are you going?” But no Word had yet reached Peter Jameson. The City held him. For the moment, the old game played itself on. It was a “quiet” time; but not so bad as he had anticipated. Jameson’s customers, disregarding the moratorium, paid their accounts; gave niggling orders. The week’s shipment arrived punctually from Havana. Nirvana, to the untrained eye, seemed hardly to have suffered. The four machines stamped and clicked all day; girls bent over the packing tables; the tin-men pricked and soldered as before. Only the pink slips of “unfilled orders” dwindled and dwindled, the piles of unsold cigarettes in the stock-room rose and rose. Peter was sitting alone in the back-office at Lime Street, thinking how soon he would have to begin paying off his “hands,” when Parkins announced, “Mr. Raymond P. Sellers.” “What does he want?” asked Peter. “I think it’s an American gentleman, Sir. He said he had a ‘proposition’ to put before you.”
- 72. “Ask him to come in.” There entered a clean-shaven young man with gold eye-glasses, in square-shouldered clothes, square-tipped patent leather shoes, carrying a Panama hat in one hand and a reporter’s note-book in the other, who ejaculated: “Say, Mr. Jameson, I’m real glad to meet you,” in a voice which no citizen of the United States ever used on land or sea. Peter started to shake hands; looked up at his visitor; and burst out, “Francis, you blithering idiot, what on earth are you doing in that get-up?” Francis looked round to see if the door were closed. Then he said, in his ordinary voice, “It is a bit grotesque, isn’t it? But as the special representative of an anonymous American newspaper syndicate, I think it will pass for the next few days.” “You always were a bit of a lunatic,” said Peter gruffly, “but this is the limit. What do you propose doing in your fancy-dress?” “I’m leaving for Amsterdam on tonight’s boat, if you want to know,” answered Francis. “After that, my plans depend on circumstances. Look here,” he became suddenly serious, “this isn’t a joke. I should get into the devil’s own row if ‘they’ knew I’d been down here. You mustn’t tell a soul, Peter. Honestly. Not even Patricia. I know it sounds like a penny-novelette—but most of the penny-novelettes are coming true at the moment. Word of honour, old man, you won’t tell a soul.” Peter glanced at his cousin; saw that the slackness had disappeared from his face. The lips were tight-set, the eyes dark with suppressed emotion. “Word of honour, Francis. I won’t tell a soul. Not even Patricia. Why did you come here though, if it was against—” he stumbled over the word—“orders?” “Because there’s no one else I can trust. It’s a question of my correspondence, and the flat. I want you to look Prout up occasionally. He thinks I’ve enlisted. Here”—he fumbled in his pocket —“are eight letters for him. From me. Have one posted every three weeks. I’ve pencilled the dates on the flap. You can get some one to post them from the country, I suppose.” Peter took the letters;
- 73. nodded comprehension. “There’s a cheque in each of them, so you needn’t worry about giving the older bounder any money. I’ve told him you’ll call, and that he’s to give you any correspondence that comes for me.” “What am I to do with it?” asked Peter. Francis hesitated a perceptible second before saying, “I want you to open everything that comes except—letters from America. Answer them all. Say I’m away, if you like. Joined the Army. I don’t think there’ll be any bills. If there are, they can wait.” “And the letters from America?” “Those, I don’t want you to open on any account. Keep them for me till I come back. If you don’t hear from me in six months, better say eight months, burn them. And post this.” He took another envelope from his pocket, handed it to Peter, who saw, in his cousin’s sprawly handwriting, “Miss B. Cochrane. C/o The Guaranty Trust Company of New York. To be forwarded.” There was the usual awkward silence which betokens sentiment among English people. Then Peter got up, walked over to the safe, pulled out his private cash-box, and locked up the letters. “That’ll be all right,” he said. “But why eight months? You don’t expect the war to last as long as that, do you?” Came footsteps outside, a hand at the door-catch. “Well, good-bye, Mr. Jameson. I’m sure I’m very much obliged to you for the information.” Mr. “Raymond Sellers” shook hands effusively; half bowed to Simpson, and departed. “Who was that chap?” asked Peter’s partner. “That was only . . .” Peter stopped himself in time, “an American newspaper fellow—cadging advertisements for one of their trade- journals.” “Tobacco Leaf or the other one?” “The other one,” said Peter nonchalantly.
- 74. § 2 To Peter Jameson’s rather narrow imagination, as yet untouched by the new melodramatic world, the whole interview with Francis appeared fantastic. He could neither visualize the steps which preceded that interview—the coming of the idea, the remembering of an old school-friend in the Foreign Office, the chivvying about from pillar to post necessary for the securing of “peculiar” employment, the two days of schooling by the quiet little civilian at “S,” the final instructions; nor the resultant arrival of “Mr. Raymond P. Sellers” at a certain hotel in Amsterdam, where he waited in his clean bedroom overlooking the canal till a very ordinary-looking Dutch merchant—having closed the door carefully behind him—said, “Hello, Gordon. I didn’t know you were one of us.” . . . No! Peter certainly couldn’t visualize his cousin in the rôle of a secret-service agent. And such a secret-service agent—Philips Oppenheim in the flesh! He remembered, of course, that Francis had always been rather a dab at languages; remembered his talking German at a not too savoury dancing-hall in Singapore where they had once foregathered. But surely there never was a man so utterly unfitted for such a job, so absolutely certain to make a muck of it, as Francis Gordon. “Fantastic,” decided our Mr. Jameson; and went on with his work.
- 75. § 3 Nevertheless, the interview left its mark in more ways than the pencilled notes “Post F’s letters” in Peter’s business-diary. Two more weeks drifted by; news, unsatisfactorily scanty at the beginning, grew unsatisfactorily complete. So far, the enemy had it all their own way. Business, on the other hand, showed a tendency to revive—Nirvana business especially. With the economies effected, a little more trade—provided nothing interfered with their exports— would ensure them against actual loss. Bramson had cheered up, Simpson and the cigar-business dropped back into their usual lethargy. But our Mr. Jameson, for the first time in years, felt himself lacking in concentration. This lack of concentration, as he carefully explained to himself, was in no wise due to the bad news. As an Englishman, and one who vaguely recollected the South African campaign, he had never expected a walk-over. Things looked pretty bad at the moment. Paris might possibly fall—though it hardly seemed likely. That would be awkward, of course: but by no means an irretrievable disaster. . . . Nor, he decided, had business anxieties affected his grip of things financial. Nirvana could be saved. The main problem had been grappled with. Now—granted his continued personal attention—it was only a question of patience. . . . Then, why the devil this strange inability to concentrate, this growing annoyance? A good many people had begun to annoy Peter—Julius Hagenburg among others. The man, proud possessor of a British naturalization certificate taken out in 1912, had of course every right to change his name if he thought fit. But Peter could not get accustomed to him as “James Hartopp, Esq.” And his loud-mouthed patriotism, even though he had squared off almost all his old account, and given a large order, somehow offended. There were a good many such naturalized Germans in the Havana cigar-trade; many of them with sons who had already enlisted. But every time he met one of them—old Schornstein, for
- 76. instance, with his “Ve must vait and see, my poy. Ve must vait and see,” or Blumberg eager to explain that “De liperal barty had saved de gountry,”—Peter experienced a new prejudice. But Jameson’s connexion with Beckmanns provided the crowning annoyance of all. Peter and Simpson had decided—as soon as the legal position became clear—that it would be ridiculous to stop importing the brand immediately. They must, of course, do their best to replace the goods with those of another factory. On the other hand, to give them up without finding a substitute, would merely mean turning over an important advantage to some less-scrupulous competitor. Still,—whatever the “Proclamation as to trading with the Enemy” might say about “firms domiciled in neutral countries”—Peter could not get out of his mind that the actual owners of the concern were Germans. Every Friday afternoon, as Simpson dictated his careful letter to them, ending with the old stereotyped phrasing “with kind regards, Yours very sincerely,” Peter would remember Heinrich Beckmann, in his heavy boots, his black tail-coat, his hard bowler- hat, iron-moustached and curt of phrase, gobbling oysters and swilling wine at Fortis’; would see young Albert Beckmann, fat, flabby, blond, over-manicured, frothing glass at his lips, eyeing the Tänzerinnen in the gaudy night-club where they had celebrated the signing of the contract. “Huns,” Peter would say to himself—(the appellation “Hun” had just come into vogue)—“bloody Huns!”
- 77. § 4 But in addition to this growing revulsion against the enemy— (dislike of the Germans had been ingrained in the man’s character since his first day in business)—the thousand emotional flea-bites of the period began to affect Peter. That he could be hearing whispers of the English-speaking spirit—the spirit that was even then driving Francis Gordon, nervous to the depths of his imaginative soul, into dangers beyond belief, dangers that had to be faced in cold blood and absolutely alone—never struck the Chairman of Nirvana Limited. He was conscious only of a Questioning; it seemed as though every one and everything asked him something, something he could not answer. The morning newspaper began that Questioning. It lurked, somehow or other, behind the war-news, the casualty-lists. More than one name which conjured up the face of a boy known at Eton, figured in those early columns. Challis minor, in his own house, who had held onto his position till the last moment: “dying,” wrote his Colonel to his mother, “as I am sure you would have wished him to die.” Latham of the Artillery, who had fought his gun single-handed till he dropped dead over the breech-block. Peter caught himself trying to explain to a shadowy Challis minor how impossible it was for certain people, people with responsibilities like his own, to join the Army. . . . Evelyn and Primula too, now back at Lowndes Square, accentuated uncertainty. They could talk of nothing but the soldiers they had seen drilling in Kensington Gardens, the motor that had dashed—astounding phenomenon—down the Broad Walk. They reminded him of the episode, trivial at the time but constantly recurring, of Patricia’s brother, Jack Baynet. Jack had been mobilized with the 6th Division; had asked Peter and Patricia to visit him in Camp at Cambridge. Peter had promised to go, cried off at the last moment. One couldn’t very well mingle, an able-bodied civilian in mufti, with men who were going to France within the week. . . .
- 78. An eternal Questioning! Everything, everybody, seemed an embodied and personal demand. Everything, everybody—the khaki, blossoming now like a brown flower at every street-corner; the boy Parkins who had to be assured that his place would be kept before he enlisted; a traveller and two mechanics at the factory who went first and asked afterwards; Miss Macpherson’s eyes when she dictated the Havana mail; Pat. For Patricia grew very silent those days. . . . By the first week in September Peter had solved the Questioning; reduced it to a question. And the question, briefly, was this: “To join up meant the almost certain sacrifice of Nirvana. Not to join up, meant the definite loss of self-respect. Which should he do?” He had no fear of the soldiering part: on the contrary—being entirely and blessedly ignorant of warfare’s actualities—it seemed to him the obvious, glorious and easy solution of his problem. To abandon his business-responsibilities, on the other hand, implied—quite apart from the pang of giving up the thing he most loved—a lack of moral courage, a yielding to popular clamour. Curiously enough, it was not Patricia but Hubert Rawlings who clinched Peter’s decision.
- 79. § 5 It was a month and three days since the outbreak of war. Paris— thought Peter, as he sat alone in the back office at Lime Street—was practically safe. Still, it might easily be six months before the Cossacks got to Berlin. Meanwhile. . . . The telephone-bell jangled; he took up the receiver, heard his brother-in-law’s voice. “Peter Jameson speaking. . . . That you, Hubert? . . . Right, I’ll be in if you come along at once.” Hubert Rawlings, Publicity Agent, had not been worried with any whispers of the “English-speaking spirit.” The contemptible cry of “business as usual” found him a ready convert. Government officials, eager to do anything except fight, had decided on a campaign of advertising, as wasteful to the country’s purse as it was degrading to its patriotism; and in Hubert Rawlings they discovered an invaluable henchman. Posters, leaflets, newspaper-stereos—one more revolting to decent folk than the other—spawned themselves in his lower- middle-class mind, spewed themselves over London and the provinces. Officially, he made no profits on these transactions, actually. . . . And in addition, there was always the advantage of being “in with the Government.” One might get . . . Heaven knows what one mightn’t get. . . . Also, one had “opportunities.” Such an “opportunity” brought Hubert Rawlings to Peter’s office. He came in, silk-hatted, morning-coated, flower in buttonhole, perfectly at ease. Already his voice had assumed a faint touch of the “Whitehall manner.” “How do you do, Peter?” he said. “I hope you didn’t wait for me.” “Afternoon, Hubert. Take a pew. What’s the trouble?” “I came,” announced Rawlings mysteriously, “to ask you if you’d like to have a share in a—little deal some friends of mine are interested in. I need hardly tell you it’s all fair and above-board, or of course I shouldn’t have anything to do with it. Still—” he dropped his
- 80. voice. “Naturally, anything I say remains strictly between the two of us.” “Of course,” said Peter. “It’s like this,” went on Rawlings. “I, we, happen to know that there will shortly be a big demand for a certain article.” Encouraged by Peter’s non-committal attitude, he waxed confidential. “I may as well tell you what the article is. It’s overcoats.” “Overcoats?” “Yes. For Kitchener’s Army. You know, I presume, that owing to shortage of dye, there has been a delay in the deliveries of khaki. A very serious delay. So the men are to be provided, as a temporary expedient, with civilian great-coats. Ready-made. Do you follow me so far?” “Perfectly,” said Peter stiffly. The other, had he been looking, might have noticed a dangerous quietness in his brother-in-law’s attitude. “Now I, we, have an option on ten thousand of these overcoats. There are four of us in the deal so far. The coats work out, for cash, at fifteen shillings. . . . The War Office is paying twenty-five. That”— the voice became unctuous—“means a profit of. . . .” “Five thousand pounds,” snapped Peter. For a moment, old habits asserted themselves; he was tempted. A thousand more for Nirvana! Then all the emotions of four weeks blazed into cold flame. He got up from his chair, eyes black with rage; controlled himself in time; and said slowly:— “Don’t slam the door as you go out, Rawlings.” “But surely . . .” began the other. “Did you hear what I said?” “Yes, but . . .” “Damn your eyes, will you get out of this office before I throw you out? . . .” Rawlings went.
- 81. § 6 Two nights later—at the very moment when the Beasts in Gray, muttering “Grosses Malheur” as they shuffled through darkling towns, were reeling back to the Aisne before the Armies of France and a handful of Englishmen—Peter Jameson and his wife sat over their coffee in the drawing-room at Lowndes Square. All through dinner, he had been absorbed and reticent. Now, he put down his empty cup on the little table by the side of his armchair; took a long pull at his cigar; began to speak. For a month she had watched him; speculated about him; hoped; doubted; realized his difficulties. But she had given no hint of her feelings: this was a matter for a man’s own conscience; no woman, not even his wife, possessed the right to influence him. “I want to talk to you,” he said. “Yes, dear.” A little of what he must say, she knew. Her eyes kindled to the prospect of it. “Pat,” he began, “I don’t think I can keep out of this thing any longer. It wouldn’t be”—he fumbled for the expression—“quite playing the game. But if I go, there are risks. . . .” “Naturally.” She schooled her voice to calmness. “I don’t mean those sort of risks. If anything happened to me, the Insurance would be paid. I went round to see the Phoenix People about that this morning.” Unaccountably, the reasonableness of the view irritated her. “I mean business risks. To begin with, there’s the factory.” He began to talk about Nirvana; tried to show her only the financial position. His personal feelings, he felt, must not be allowed to complicate a simple issue. But the intonation of his voice betrayed the feelings behind it; and she realized, for the first time, how much Nirvana meant to him. “You would hate to give it up,” she interrupted. “It would be rather,” he hesitated for a moment, “a wrench. Still I’ve discounted that. Of course, the whole thing’s a gamble. But I’m
- 82. not going to quit yet. After all, I shan’t go out for some time. Meanwhile, I can keep in touch. Only I won’t put any more capital in. If Reid and Bramson between them—I saw Reid yesterday and he’ll do his best—can manage to keep her going: well and good. If not, we must cut our losses.” “Will they be very heavy?” “They might be. But that isn’t all. . . .” “Oh, what do you care about losses?” her heart cried out in her. “He’s going. He’s a man. What else matters?” And then, suddenly, fear held her, battling down reason, patriotism, pride, everything except itself. . . . But the man’s voice went on talking—coolly, logically, impersonally. That he was voicing the spirit of a great sacrifice, that Patricia realized the sacrifice, loved him for it, that the “pal” he had known for eight years existed no longer, had become at a word his mate, his woman to do with as he would—these things were hidden both then and for long after from Peter Jameson, cigar merchant. . . . “So you see,” he said, summing up the case as he saw it, “it means a big risk. If the factory goes down, if Jameson’s business doesn’t improve, if Simpson won’t renew the partnership agreement in January, if one or any of these things happen, it might mean giving up this house. . . .” Inwardly, the bathos of it made her laugh. If he could give up so much, surely she could give up her little. Reason and the training of years came to her aid. To him, she was still the pal, only the pal. Nothing more than that! “I quite follow, dear,” she said. “But we won’t consider the black side, old thing. Don’t let’s panic. The War may be over by Christmas. Till then, we’ll carry on just as we are. I shan’t even get rid of the motor.” Now that the awkward task of putting the position before his wife was over, optimism held him. For a moment, the sense of having done the right thing blurred his business judgment. “You’re a topping pal, Pat,” he said to her as they kissed good- night. . . . But Patricia, waking to the first shimmer of dawn through
- 83. the chinks of the silk curtains, felt herself, for the first time, woman indeed. For now she loved him, utterly, beyond friendship: and lying there, quite still in her own narrow bed, she vowed this new love to his service in whatsoever guise he most should need it. . . .
- 84. § 7 “The whole thing’s a farce, Pat.” It was already three weeks since Peter had been promised his commission; two since his “kit” had been delivered from his tailors. Outwardly the situation between husband and wife had not altered. Reason told her that this new love she felt for him could win its reward only by patience. And she needed all her patience those days. Disorganization held no humour for Peter Jameson. His patriotism, if it could have found expression, would have vented itself in few words: “There’s a job to be done. A rotten job. Let’s do it, and get back to our businesses.” He was still—in the intervals of importuning the War Office—running those businesses; hearing telephoned reports; suggesting this, vetoing that. But more than a fraction of the old-time keenness had evaporated. The blind spirit of War had caught him, was carrying him onwards. . . . He walked over to the bureau between the windows; picked out a telegraph-form from the racked paper-holder; began to write. She looked at him across the breakfast-débris—calm, golden- haired, very fresh in her white blouse, her blue walking-skirt; guessed, from the bent back, the concentration in his taut brain. Looking, love leaped into her dark eyes, moistening them. “I think this’ll do,” he said, turning so suddenly that she scarcely had time to drop her lashes: “Colonel Thompson. Room 154. War Office. Reference our recent interview am now ready and shall be glad of instructions to report for duty. Reply paid. Jameson. 22a, Lowndes Square, W.” “You can’t send that,” said Patricia. “Can’t I?” He rang for Smith, gave instructions for immediate dispatch of the wire.
- 85. § 8 Patricia, coming in from her afternoon walk with the children, found a tawny envelope on the hall table. The telegram was addressed “Jameson,” and she opened it casually; felt her heart stop as though two fingers had clutched it; heard Primula’s voice: “What’s the matter, Mummy?” . . . “Nothing’s the matter, dear,” she said calmly. “You and Evelyn had better go upstairs to Nanny.” She watched them, running up the broad stone staircase, out of sight. Then she read the pencilled message again: “Report for duty 10th Chalkshires Shoreham Camp immediately. Thompson. War Office.” “What a fool I am,” she said to herself. “What a selfish unpatriotic fool!”
- 86. PART SIX PLAYING AT SOLDIERS
- 87. § 1 Except for the newness of his “Cavalry-cord” tunic and a slight lack of suppleness in the carefully-browned belt, nothing about the quiet gray-eyed young man in the otherwise-empty first-class compartment on the London, Brighton & South Coast Railway betrayed the civilian of a day ago. The battered valise and an old- fashioned Army basin, leather-covered—relics of a trip to the East— did not smack of the newly-joined. Close-cut dark hair, clipped moustaches, correctly-wound puttees and dubbined shooting-boots, completed the illusion. But Peter Jameson’s mind had not yet cast off its old allegiances. Rather, as he whirled Sussexwards, did those discarded problems assume acuter import. One by one he conned over the arrangements made—fortnightly reports from Lime Street, weekly statements and a bi-weekly letter from Bramson, accurate statistics from Reid; wondered if they might have been improved upon. And speculating on these things, Peter began to feel—for the first time— the real pang of parting from Nirvana. It was as though he had cut the main interest out of life; as if the entity of his creating had died. Symbolically, he seemed to see his two flashing signs, as they had been before the new lighting restrictions; “NIRVANA OR NOTHING,” they had blazed. Now, they blazed no more. Nothing! He pulled his “Infantry Training” from his pocket; began to study Battalion Drill. “A battalion in mass. . . .” But the subconscious mind would not visualize battalions either in mass or other formations. The mind returned to its old love, refused to be comforted. The mind did not recall the morning’s partings— with Patricia, careful to display no emotion,—with the children, excited at their first vision of “Daddy in khaki.” Instead, it called up figures from balance-sheets, the factory working at full pressure, that dim-lit back-office in the City: till gradually, came recollection of Mr. “Raymond P. Sellers.” . . .
- 88. Peter had already posted two of the letters to Prout, visited the Bloomsbury flat as promised, found everything in order. Only a photograph, a girl’s photograph, was missing. And that, Peter had not noticed. But from Francis Gordon himself had come no word. The War seemed to have swallowed him up, utterly, mysteriously. So Peter sped on, through the bright countryside, thinking of his cousin. . . . And at that very moment thousands of miles away, in a great hotel at Los Angeles, California, a girl said to herself: “Even if he has gone to the war, it’s mean of him not to write and tell me so.” She stood at the window for a moment, looking out onto the sunlit lawn. Till suddenly, the lawn seemed to grow dark. “He can’t have been killed,” she whispered. “He can’t have been killed.” It is not easy for “agents in enemy countries” to keep up a regular correspondence with the young women whose photographs they carry in their pocket-books!
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