of such monopoly power, or contrariwise, with the prospect of easy and quick imitation and vigorous competition, the incentive to undertake these expensive risky innovations would evaporate. Vigorous competition in the innovative process would cause this process to wither on the vine. Monopoly power in this connection is the very life-giving air on which economic progress thrives. Monopoly power as a source of restraint on economic progress

As usual, there are at least two sides to every question, and this is no less true on the issue of the role of monopoly power in the innovation process. For one think, it would be an egregious mistake to identify the growth of monopolistic power with superior entrepreneurial ability. In some cases, such as the Ford Motor Co., there doubtless has been a large element of this superiority behind the accrual of such power to giant firms. But looking back over the past, particularly to the great merger movements in the period around 1900 and in the 1920's, we find that the greatest source of impetus to these movements originated in the desire to curb competition and from the great profits for the promoters of these mergers. Today, such things as tax considerations, desires to assure sources of supply or market outlets, or product diversification seem to be fostering mergers, rather than any unusual entrepreneurial talents-at least of the type that necessarily bodes well for technical progress.

Moreover, quite the opposite from being a convenient vehicle for the exercise of the talents of the dynamic and imaginative entrepreneur, the large corporation can lead, and has led, to developments not conducive to the risk-taking that is associated with innovation. Chief among these is the emergence of bureaucratic organizations of officials to carry out the multiple, complex functions inherent in modern large-scale enterprise. The bureaucrats of the large corporations, usually cloaked with substantial monopoly power, develop a strong sense of security about their jobs, a "career" attitude toward managerial positions, that make it imperative to be a good "organization or team man," to follow the accepted rules of action and behavior." These are not the qualities of the prospective innovator. Risky ventures are avoided that might destabilize existing market situations and threaten the position of the entrenched managerial bureaucracies, which operate better in a stable, rather than a changing, environment; these bureaucracies tend to become instruments of resistance to, not promoters of, change.

Moreover, it must be remembered that innovations that are substitutes for existing products and processes involve losses from the scrapping of existing plant and equipment. Firms protected by monopoly power may be expected to try to avoid such losses by postponing innovation until the existing capital goods have considerably depreciated. Why render obsolete with a new innovation what may have been painfully built up in the past? And this is no less true of firms that spend large sums on research than of those who do not. In fact, for the former, much of their research may be aimed at the protection of existing monopolistic strength, as well as the avoidance of capital loss through obsolescence-by obtaining patents ahead of others threatening the firm's entrenched position. Scrutiny of the innovational behavior of the electric lamp,. radio and television, railway locomotive, and telephone industries, among others, discloses that innovations of competitive products have occurred only after long periods of market exploitation of old products. The investigations of a number of writers have brought them to the conclusion that new firms are very often needed if radically new innovations are to take place; this has even been true in industries where the established firms have had reputations for progressiveness, such as the electric lamp and telephone industries.12 A study of new firms established in Connecticut after World War II reveals that a large percentage were set up in order to innovate a new product invented by one of the owners. Frequently, the inventor felt constrained to leave his previous job for this purpose because he could not interest his superiors in his invention."

11 For interesting and incisive discussions of the extent to which these qualities of corporation executives are now being emphasized, see Vance Packard, "The Hidden Persuaders" (Philadelphia, D 1957), ch. 18; and W. H. Whyte, "The Organization Man" (New York, 1956).

12 See W. R. MacLaurin, "Invention and Innovation in the Radio Industry" (New York, 1949); A. A. Bright, "The Electric Lamp Industry: Technological Change and Economic Development," 1800-1947 (New York, 1949); and R. Schlaifer and S. D. Heron, "The Development of Aircraft Engines and Fuels" (Cambridge, Mass., 1950). See also, Nelson, op. cit., pp. 108-109.

is See G. Brown, "Characteristics of New Enterprises," New England Business Review, June and July 1957. Cited in Nelson, loc. cit.

This information should not be unexpected. Innovation is certainly expensive and risky. The intelligent entrepreneur is all too aware of this, particularly if he has recently experienced the trials and tribulations of innovation and market consolidation. Following this experience, a period of quiescence is apt to be the most attractive situation. With good profits, monopoly powers that may insulate well against potential competition, executives are more prone to refrain from innovation, to be content with protecting the fruits of past efforts. They are hardly likely to want to render obsolete soon afterwards with a new innovation what may have been painfully built up in the past. Competition as a source of innovational incentives

These problems do not arise when there is active and intense competition, although not necessarily pure competition. The adoption of new techniques or products by some firms under competitive conditions literally forces the rest to follow suit, to abandon its existing equipment and write off the losses, or else run the risk of being undersold or losing customers to the new products being introduced by the competitors. In addition, a firm without significant monopoly power, whose share of the market is small, will find the adoption of the latest techniques and products especially attractive as a means of underselling competitive firms and invading their markets. For the losses from scrapping existing equipment will seem rather minor compared to the profits to be garnered from the enlargement of its markets. It is the monopolistic firm, with a sizable portion of the market, that finds losses on sunk capital large compared with prospective profits from further broadening of its market share.

Likewise, competition in contrast with strong monopoly situations, is ordinarily associated with freedom of entry, with the full freedom for new firms to enter an industry with new and cheaper techniques or new, substitute products. The new firm, too, is likely to be a more aggressive innovator. By definition, it has no vested interest in maintaining the capital values of existing plant and equipment, no vested interest in maintaining existing markets. It will want to take advantage of the latest techniques and equipment, and in doing so will force the existing firms to fall in line or be outsold.

Monopoly, on the other hand, obstructs the entry of new firms. Sometimes, it does this by deliberate action, as by threatening destructive price competition, patent shelving and expensive and drawn-out patent litigation, controls oversupplies of important materials, etc. At other times, the mere strength of the monopolistic firm's hold on the market may act as a strong deterrent to the entry of new firms.

Perhaps the outstanding feature of active, intense competition in connection with the innovating process is the persistent pressure it exerts to search for and adopt innovations that would otherwise be delayed if introduced at all. It is sometimes said that strong monopoly power is not necessarily inconsistent with innovation. Despite what was said above, there are large firms that can and do have vigorous managements vitally interested in research and development, of sanguine outlook and adventurous spirits, and constantly willing to exploit new ideas in the marketplace. This is true; there are indeed firms with such managements. But we have also seen that there are many firms, with much monopolistic power, whose managements have not been of this ilk.

The advantage of active, intense competition lies in the fact that it does not leave innovative ability and behavior to pure chance. The persistent pressures from competition provide a compelling force to innovate or fall behind and perhaps eventually disappear altogether. Competition is also the proper stimulant to prevent firms from seeking "the quiet life," from being content to reap the fruits of past efforts and rest on their laurels. If it is true that modern managements of large corporations are not profit mad, grasping ogres, anxious to maximize earnings, it follows that the drive for profits is no longer the reliable spur to innovations it was once thought to be. Competition again, however, does not rely on the chance existence of a strong drive for profits. It provides an inspiration to innovate all its own.

In reply, it is often argued that even firms with apparently substantial degrees of monopoly power are not immune to strong competitive pressures. There have been dramatic struggles even in monopolistic (or oligopolistic) markets; new firms have overcome obstacles in the past and encroached seriously upon monopolistic markets; interindustry competition among otherwise monopolistic firms producing substitute goods has often waxed hot, and so on. In brief, competition is an ubiquitious and pervasive force from which no firm can ever completely cut itself off and enjoy peace and tranquility.

There may be a strong element of truth in this view, although there certainly have been protracted periods during which many large firms have been able to enjoy peace and quiet. Irrespective of the truth of these remarks, however, they can hardly be regarded as a defense of monopoly power. They merely show that despite its existence elements of competition make their presence felt. This sounds like a very good case for enlarging the area in which competition is allowed to operate, that is, for weakening the forces of monopoly.

Temporary versus entrenched monopoly power

We have yet to deal with the argument that monopoly power is a necessary incentive to innovation. This argument, remember, rests on the premise that the prospect of excess profits stemming from monopoly power are needed to induce potential innovators to undertake the great risk and expense that is often associated with innovation. If potential imitation is quick and easy, there is little inducement to accept the possibility of losses. There is undoubtedly considerable merit in this reasoning, and of course, upon it rests the basis for the patent system, which is certainly one of the outstanding but widely accepted, forms of monopoly. Paradoxically, from the point of view of maintaining competition, there is an even more persuasive case in favor of the patent system. It is the one source of potential reward for the independent inventor or new and/or small firm attempting to market a new process or product. Certainly, any efforts to raise outside funds with which to exploit inventions would be well-nigh hopeless without the patent.

However, even if we grant the validity of this form of monopoly power, this is something quite different from granting the general validity of all forms of monopoly power, even for economic progress. In examining the role of monopoly power in economic progress, we must be careful to make a proper distinction between those temporary monopolies that are needed to induce investment and the more general and established monopolies that threaten to, and often do, stifle progress, for we have found nothing in established monopolistic power that necessarily constitutes a source of incentive to innovate; on the contrary, we have found much that may smother progress. If established monopolies remain progressive, this characteristic may probably be traced to the persistence of competitive pressures, or possibly to chance attributes that make management interested in invention and innovation.

Even in the case of the supposedly temporary monopolies granted by patents, there are many instances of strong innovative activity without them, or with patents of dubious value, because the original inventions were subject to sufficiently close imitation as to negate their exclusive value. This knowledge should make us wonder whether the value of the patent system, and its temporary monopoly power, hasn't been exaggerated. Questions of this sort have even been raised in connection with that almost uniquely expensive innovation, nylon, on which some $6 million were reportedly spent. It is asked whether in the face of the obviously enormous market decreed by fashion, a number of firms wouldn't have been willing to risk this innovation under competitive conditions. And in the face of the numerous competitive synthetic fibers that were already in prospect at the time nylon was marketed, it may be asked just how much of an incentive the patent on nylon offered. In view of the ease with which so many inventions may eventually be imitated, it may rightfully be asked whether the gains from patents are really in the nature of monopoly profits or whether they merely reflect the profits that accrue to the innovator simply because he is ahead of others and that a time lag is involved before the rest can catch up. Some large corporations implicitly recognize the legitimacy of this question by making most of their patents available to everyone in the knowledge that patents have a very restricted utility, because imitation is so easy. However, this is no place to go into an extended discussion of the patent system.

Whatever the merits of temporary forms of monopoly power like those granted by patents, one thing seems certain. There are so many instances of innovations by firms possessing little or no monopoly power that we can feel free to cast to the winds most of the suggestions that established monopolies are a necessary, or even an important, ingredient of economic progress. The one feature of large business size and monopoly power that appears to carry considerable weight is associated with the usually large (absolute) profits of the big monopolistic firm as a source of funds to finance research and innovation. This, however, is simply one aspect of the well-known differential access to finance of the

small and large firms. To recognize this finance problem, however, is not necessarily to condone giant size and monopoly power as the solution. Financial aid to small business of the sort envisioned in the establishment of the Small Business Administration and the recent expansion in its activities offers a more hopeful and worthy solution. But such programs must be carried out on a much larger scale if they are to succeed in their goals of maintaining and enlarging the scope of competition in our economy.

APPENDIX I(C)

United States, 1953 expenditure on research and development per company for all companies conducting research and development—by size groups of companies and industries 1

1 Based on National Science Foundation, "Science and Engineering in American Industry," tables A-3 and A-9, cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention."

United States, 1951—Ranking (1–14) of major industrial groups as to research and development expenditure and size of firms

Col. (1) based on tables in "Scientific Research and Development in American Industry, 1953," Bull. 1148, U.S. Department of Labor.

Cols. (2) and (3) based on size characteristics of the business population, "Survey of Current Business, May 1954" cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention, 1958.'

49646-60---27

Chemical and allied products-United States, 1951,1 percentage of cost of research and development to value of sales

1"Scientific Research and Development in American Industry, 1951," U.S. Department of Labor, table C-20 cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention, 1958."

PREPARED STATEMENT OF B. G. WEIL, PATENT COUNSEL, THE MARTIN Co., BALTIMORE, MD.

Hon. RUSSELL B. LONG,

Chairman, Subcommittee on Monopoly,

DECEMBER 4, 1959.

Select Comimttee on Small Business, U.S. Senate, Washington, D.C.

DEAR SENATOR LONG: This letter is written in reply to your letter of November 19, 1959, inviting the Martin Co. to submit a written statement of its experience under present Federal policies with respect to patents and technical knowledge resulting from Government-financed contracts. We regret that we were unable to have this statement to you by December 1 for reasons explained to Mr. Gordon. your staff economist. We also wish to acknowledge advice from Mr. Gordon to the effect that this statement will suffice the needs of the committee and that no witness from the Martin Co. is required at your hearings.

Martin is presently, and has been for some years past, almost wholly engaged in the production of items for sale to the U.S. Government either directly as a prime contractor or indirectly as a subcontractor. Its sales to the Government, under Government contracts, amount to more than 99 percent of Martin's sales. Commercial sales predominantly result from spare parts for commercial aircraft which it produced and sold in and prior to 1953. Consequently, the sale of its products in the commercial market is not a matter of controlling importance or financial significance in the recent operations of the Martin Co.

This intense concentration by Martin on the Government market came about from a change of management at Martin, occurring about the beginning of 1952. Our new management felt that Martin should withdraw from the commercial field and specialize in the field of national defense products such as guided missiles, electronic systems, military aircraft, and special nuclear systems for defense applications.

Furthermore, Martin has undergone other radical changes in its business besides withdrawal from the commercial field since 1952. The trend away from the aircraft business has gone even further in the interim period. Today, Martin is to all practical purposes out of the aircraft business. It does not expect to design and produce another aircraft. Our transition to the space, nuclear, missile, and electronics field is nearly complete.