[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Whitney’s cotton gin
Case in Point
ELI WHITNEY AND THE COTTON GIN
Obtaining a patent does not necessarily guarantee the inventor a return on the discovery.
Others may “infringe” on the patent—that is, use the idea without paying
for it—forcing the inventor to go to court for redress. The story of Eli Whitney and
the cotton gin provides a famous example.
Late in the eighteenth century, the textile mills of England and the northern
American states were up and humming, but they seemed always to be short of cotton.
The kind of cotton grown in the southern United States could have filled the need,
but separating the seeds from the cotton was labor-intensive and hence costly. Eli
Whitney invented the cotton gin to perform that task inexpensively, then did what
an inventor is supposed to do. He applied for a patent and received one in 1794. After
finding a partner to put up the money, he started a business to make machines that
would clean the seeds out of cotton. The cotton gin turned out to be a wonder, bringing
prosperity to the American South. But Whitney received little of the benefit.
The problem was that Whitney’s machine was both very effective and very simple.
Cotton planters found it easy to copy the cotton gin, and they were careful to make
a few minor changes in their versions. When Whitney sued for patent infringement,
courts in cotton-growing states tended to find that his patent had not been infringed.
Eventually, the states of South Carolina, North Carolina, Tennessee, and Georgia
agreed to pay a lump sum to Whitney to purchase the rights to his invention, though
the amount paid was barely enough to enable Whitney and his partner to recoup
their expenses.
Whitney continued his lifelong career as an inventor, but he never bothered to
patent an invention again. As he once wrote: “An invention can be so valuable as to
be worthless to the inventor.” Whitney’s experience was extreme. Today patent laws
provide essential protection for scientific firms engaged in producing new and better
products. They may choose to share their new technology by selling others the use
of their patents in return for royalties, which represent a substantial fraction of the
revenues of some firms.
R & D AS A FIXED COST
Patents and trade secrets are not the only reasons why industries in which technological
change is important are generally not perfectly competitive. A second explanation
is that R & D expenditures are fixed costs. That is, the cost of inventing
something does not change with the frequency of its use in production. 2 The size of
fixed costs helps determine how competitive an industry is. The larger the fixed
costs relative to the size of the market, the greater the likelihood it will have few
firms and limited competition.
2 R & D expenditures can themselves be varied. Differences in the expenditure level will affect when new
products will be brought to market and whether a firm will beat its rivals in the competition for new products.
460 ∂ CHAPTER 20 TECHNOLOGICAL CHANGE