Undercover Economist

Eyes on the innovation prize

‘Coming up with something new is for suckers; smart people sit back and rip off the idea later’

In 1737, a self-taught clockmaker from Yorkshire astonished the great scientists of London by solving the most pressing technological problem of the day: how to determine the longitude of a ship at sea. The conventional wisdom was that some kind of astronomical method would be needed. Other inventors suggested crackpot schemes that involved casting magic spells or ringing the world with a circle of outposts that would mark the time with cannon fire.

John Harrison’s solution — simple in principle, fiendishly hard to execute — was to build an accurate clock, one that despite fluctuating temperatures and rolling ocean swells, could show the time at Greenwich while anywhere in the world. Harrison and countless other creative minds were focused on the longitude problem by a £20,000 prize for the person who solved it, several million pounds in today’s money.

Why was the prize necessary? Because ideas are hard to develop and easy to imitate. Harrison’s clocks could, with effort, have been reverse engineered. An astronomical method for finding longitude could have been copied with ease. Inventing something new is for suckers; smart people sit back and rip off the idea later. One way to give non-suckers an incentive to research new ideas, then, is an innovation prize — that is, a substantial cash reward for solving a well-defined problem. (Retrospective awards such as the Nobel Prize are different.)

For decades after Harrison’s triumph, prizes were a well-established approach to the problem of encouraging innovation. Then they fell out of favour, with policymakers instead encouraging innovation with a mix of upfront research grants and patent protection. Now, however, prizes are making a comeback. The most eye-catching examples have been in the private sector: the $1m Netflix prize for improved personalisation of film recommendations or the $10m Ansari X prize for private space flight. Last year Nesta, a UK-based charity for the promotion of innovation, launched a “new longitude prize” of £10m for an improved test for bacterial infections, marking the anniversary of the original prize’s founding in 1714.

But the big money potential is in the public sector. In 2007, several governments (and the Gates Foundation) promised a $1.5bn prize for a vaccine for pneumococcal meningitis. The prize, called an “advanced market commitment”, is structured as a dose-by-dose subsidy rather than one giant cheque. It is being paid out and millions of children have already been vaccinated. Much bigger commitments are possible: before US senator Bernie Sanders began his run for the presidency, he introduced two Senate bills that would have provided almost $100bn a year as medical innovation prizes.

But why are innovation prizes attractive, when the existing system of grants and patents seems to have served us reasonably well so far?

Research grants may be too conservative, favouring establishment figures working on unambitious projects, and rewarding process rather than results. Such conservatism is not inevitable but it goes with the territory. An innovation prize seems more meritocratic and, since it pays only for results, the prizes can set radical goals.

Patents are particularly problematic, since they encourage the development of something that anyone can use — a new idea — with the perverse reward of restricting access to that idea. That is a trade-off that is easily bungled, with patents that last too long, are too broad, too easy to secure and too difficult to challenge.

Even a well-crafted patent system depends on there being a ready market for the innovation in question. Few people will pay much for a malaria vaccine but it would be socially very valuable, as would a new class of antibiotics. A prize can easily reward long-term social priorities such as these; a patent cannot.

But there is a danger of expecting too much from prizes. If we are to scrap patents entirely, prizes would be far too narrow a replacement. (Who would have sponsored a prize “for inventing the internet”? Not all innovations exist to solve precooked problems such as finding longitude.) If we use patents and prizes in parallel, however, there’s a self-selection problem: inventors with truly valuable ideas apply for patents, while those with dross apply for prizes. A new working paper from economic historian Zorina Khan points out that Royal Society of Arts prizes in the 19th century suffered from exactly such adverse selection.

Khan also observes that many celebrated historical innovation prizes were actually mired in controversy, with prizes awarded for unoriginal or ineffective ideas, or denied to the deserving. It’s easy to point to a few success stories but there are plenty of those for patents and grants too.

For my money the patent system urgently needs reform, with patents that are harder to earn and easier to challenge. Innovation prizes definitely have their place, especially where markets for a socially valuable innovation may not exist. But we do a good idea no favours by overselling it. We should also probably stop going on about the Longitude Prize or at least we should admit what Nesta’s new prize website does not: that Harrison’s invention was rewarded with decades of suspicion and controversy. The Board of Longitude, the government body set up to administer the prize, questioned both the accuracy of his clocks and whether they could be replicated. Harrison did receive numerous payments for his efforts — but neither he nor anyone else ever won the Longitude Prize.

Written for and first published at ft.com.