Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

advanced countries trying to prevent its outflow has always been at the heart of the game of economic development.

The technological arms race started to take on a new dimension in the 18th century, with the emergence of modern industrial technologies that had much greater potential for productivity growth than traditional technologies. The leader in this new technological race was Britain. Not least because of the Tudor and Georgian economic policies that we discussed in chapter 2, it was rapidly becoming Europe’s, and the world’s, leading industrial power. Naturally, it was reluctant to part with its advanced technologies. It even set up legal barriers to technology outflows. The other industrialising countries in Europe, and the US, had to violate those laws in order to acquire superior British technologies.

This new technological arms race was started in full spate by John Law (1671–1729), the legendary Scottish financier-economist who even became France’s finance minister for just under a year. Law was named the ‘moneymaker’ by the author of his popular biography, Janet Gleeson.[12] He was a moneymaker in more than one sense. He was an extremely successful financier, making huge killings on currency speculation, setting up and merging large banks and trading companies, getting royal monopolies for them and selling their shares at huge profits. His financial scheme was too successful for its own good. It led to the Mississippi Bubble – a financial bubble three times bigger than the contemporary South Sea Bubble discussed in chapter 2 – which wrecked the French financial system.* Law was also known as a great gambler with an incredible ability to calculate the odds. As an economist, he advocated the use of paper money backed by a central bank.[13] The idea that we can make worthless paper into money through government fiat was a radical notion then. At the time, most people believed that only things that have a value of their own, like gold and silver, could serve as money.

John Law is today remembered mainly as the financial wheeler-dealer who created the Mississippi Bubble, but his understanding of economics went far beyond mere financial engineering. He understood the importance of technology in building a strong economy. While he was expanding his banking operation and building up the Mississippi Company, he also recruited hundreds of skilled workers from Britain in an attempt to upgrade France’s technology.[14]

At the time, getting skilled workers was the key to accessing advanced technologies. No one could say, even today, that workers are mindless automata repeating the same task in the manner so hilariously but poignantly depicted by Charlie Chaplin in his classic film, Modern Times. What workers know and can do matters greatly in determining a firm’s productivity. In earlier times, though, their importance was even more pronounced, since they themselves embodied a lot of technologies. Machines were still rather primitive, so productivity depended very much on how skilled the workers who operated them were. The scientific principles behind industrial operations were poorly understood, so technical instructions could not be written down easily in universal terms. Once again, the skilled worker had to be there to run the operation smoothly.

Galvanized by Law’s attempt to poach skilled workers and also by a similar Russian attempt, Britain decided to introduce a ban on the migration of skilled workers. The law, introduced in 1719, made it illegal to recruit skilled workers for jobs abroad – known as ‘suborning’. Emigrant workers who did not return home within six months of being warned to do so would lose their right to lands and goods in Britain and have their citizenship taken away. Specifically mentioned in the law were industries such as wool, steel, iron, brass, other metals and watch- making; but in practice the law covered all industries.[15]

With the passage of time, machines became more complex and began to embody more technologies. This meant that getting hold of key machinery started to become as important as, and increasingly more important than, recruiting skilled workers. Britain introduced a new act in 1750 banning the export of ‘tools and utensils’ in the wool and silk industries. The ban was subsequently widened and strengthened to include the cotton and linen industries. In 1785, the Tools Act was introduced to ban the export of many different types of machinery.[16]

Other countries intent on catching up with Britain knew that they had to get hold of these advanced technologies, whether the method used to do so was ‘legal’ or ‘illegal’ from the British point of view. The ‘legal’ means included apprenticeships and factory tours.[17] The ‘illegal’ means involved the governments of continental Europe and the US luring skilled workers contrary to British law. These governments also routinely employed industrial spies. In the 1750s, the French government appointed John Holker, a former Manchester textile finisher and Jacobite officer, as Inspector-General of Foreign Manufactures.While also advising French producers on textile technologies, Holker’s main job was running industrial spies and poaching skilled workers from Britain.[18] There was also a lot of machine smuggling. Smuggling was hard to detect. Because machines were still quite simple and had relatively few parts, they could be taken apart and smuggled out bit by bit relatively quickly.

Throughout the 18th century, the technological arms race was fought viciously, using recruitment schemes, machine smuggling and industrial espionage. But by the end of the century, the nature of the game had changed fundamentally with the increasing importance of ‘disembodied’ knowledge – that is, knowledge that can be separated from the workers and the machines that used to hold them. The development of science meant that a lot of – although not all – knowledge could be written down in a (scientific) language that could be understood by anyone with appropriate training. An engineer who understood the principles of physics and mechanics could reproduce a machine simply by looking at the technical drawings. Similarly, if a chemical formula could be acquired, medicines could be easily reproduced by trained chemists.

Disembodied knowledge is more difficult to protect than knowledge embodied in skilled workers or actual machines. Once an idea is written down in general scientific and engineering language, it becomes much easier to copy it. When you have to recruit a skilled foreign worker, there are all sorts of personal and cultural problems. When you import a machine, you may not get the maximum out of it because you may only poorly understand its operative principles.As the importance of disembodied knowledge grew, it became more important to protect the ideas themselves than the workers or machines that embody them. Consequently, the British ban on skilled worker emigration was abolished in 1825, while that on machinery export was dropped in 1842. In their place, the patent law became the key instrument in managing the flow of ideas.

The first patent system is supposed to have been used by Venice in 1474, when it granted ten years’ privileges to inventors of ‘new arts and machines’. It was also somewhat haphazardly used by some German states in the 16th century and by Britain from the 17th century.[19] Then, reflecting the growing importance of disembodied knowledge, it spread very quickly from the late 18th century, starting with France in 1791, the US in 1793 and Austria in 1794.Most of today’s rich countries established their patent laws within half a century of the French patent law.[20] Other intellectual property laws, such as copyright law (first introduced in Britain in 1709) and trademark law (first introduced in Britain in 1862) were adopted by most of today’s rich countries in the second half of the 19th century. Over time, there emerged international agreements on IPRs, such as the Paris Convention on patents and trademarks (1883)[21] and the Berne Convention on copyrights (1886). But even these international agreements did not end the use of ‘illegal’ means in the technological arms race.

The lawyers get involved

The year 1905 is known as the annus mirabilis of modern physics. In that year, Albert Einstein published three papers that changed the course of physics for good.[22] Interestingly, at the time, Einstein was not a professor of physics but a humble patent clerk (an assistant technical examiner) in the Swiss Patent Office, which was his first job.[23]

Had Einstein been a chemist rather than a physicist, his first job could not have been in the Swiss Patent Office. For, until 1907, Switzerland did not grant patents to chemical inventions.[24] Switzerland, in fact, had no patent law of any kind until 1888. Its 1888 patent law accorded protection only to ‘inventions that can be represented by mechanical models’. The clause automatically (and intentionally) excluded chemical inventions – at the time, the Swiss were ‘borrowing’ a lot of chemical and pharmaceutical technologies from Germany, the then world leader in those fields. It was thus not in their interest to grant chemical patents.

Only in 1907, under the threat of trade sanctions by Germany, did the Swiss decide to extend patent protection to chemical inventions. However, even the new patent law did not protect chemical technologies to the degree expected in today’s TRIPS system. Like many other countries at the time, the Swiss refused to grant patents