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be used as many times as one wishes, then the size of its potential market will be a
crucial determinant of whether or not it is profitable to implement it and whether to
research it in the first place. This is well captured by a famous quote from Matthew
Boulton, James Watt’s business partner, who wrote to Watt:
“It is not worth my while to manufacture your engine for three countries only, but I find it very well worth my while to make it for all the
world.” (quoted in Scherer, 1984, p. 13).
To see why non-rivalry is related to the market size effect, imagine another
standard (rival) input that is also essential for production. A greater market size
will not typically induce firms to use this other input more intensively, since a
greater market size and thus greater sales means that more of this input has to be
used. It is the fact that, once invented, non-rival ideas can be embedded in as many
units desired without further costs that makes the market size effect particularly
important. In the next section, we will discuss some empirical evidence on the
importance of the market size effect.
Nevertheless, it is important to emphasize that the non-rivalry of ideas does not
make ideas or innovations pure public goods. Recall that pure public goods are both
non-rival and non-excludable. While some discoveries may be, by their nature, nonexcludable (for example, the “discovery” that providing excessively high-powered
incentives to CEOs in the form of stock options will lead to counterproductive
incentives and cheating), most discoveries can be made excludable by patenting. An
important aspect of the models of technological progress will be whether and how
discoveries are protected from rivals. For this reason, intellectual property rights
protection and patent policy often play an important role in models of technological
progress.
12.2. Science, Profits and the Market Size
Another major question for the economic analysis of technological change is
whether innovation is mainly determined by scientific constraints and stimulated by
scientific breakthroughs in particular fields, or whether it is driven by profit motives.
Historians and economists typically give different answers to this question. Many
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