Innovation's Hidden Externalities

Abstract

When commentators discuss innovation’s externalities, they often classify them into one of two categories. On the positive externalities, or “spillovers” side, legal and economics scholars often speak of the benefits innovation confers on other innovators. Future innovators profit from past innovation as they “stand on the shoulders of giants” to develop progressively new and better innovation. Discussion of innovation’s negative externalities, on the other hand, has mainly focused on social harms not directly related to future innovation that particular advances impose on third parties—the classic example being pollution. Thus, the common understanding is that innovation’s spillovers positively impact innovation (among other things), while innovation’s negative externalities are only indirectly related to society’s collective capacity for further innovation, if at all.

This Article challenges that view, arguing that innovation does impose negative externalities on contemporary and future innovators, thereby making it more difficult for them to innovate. It discusses three mechanisms by which these negative externalities arise. The first is through path dependencies. Path dependencies in innovation can limit the innovative potential of other innovators by effectively foreclosing particular areas of study or by directing innovation along less productive paths. A second mechanism by which innovation imposes negative externalities on other innovators is through the workings of social norms. Social norms that become entrenched in innovative communities can lead innovators to adopt sub-optimal research agendas and methodologies. Third, particular innovations may work on those who adopt them at a psychological level, changing their cognition and thought processes in ways that negatively impact their future ability to innovate.

Uncovering innovation’s hidden externalities has profound implications for discussions of innovation policy. Currently, the conventional wisdom holds that innovation’s spillovers should be addressed through innovation subsidies, while innovation’s negative externalities can be addressed by taxing the externalities directly. Recognizing that innovation has both positive and negative externalities for contemporary and future innovators, however, challenges the view that the conversation about innovation subsidies (like intellectual property, tax breaks, grants, and prizes) should concern itself only with innovation’s spillovers, and not with its negative externalities.

Keywords: innovation, externalities, law and psychology, patent law, intellectual property law, law and economics, law and philosophy, law and neuroscience,

JEL Classification: O30, O31, O32, O33, O34, O35, O36, O37, O38