Alex Tabarrok - Launching the Innovation Renaissance

I'm something of a junky for the EconTalk podcast. On a recent episode, Alex Tabarrok and host Russ Roberts both of George Mason University had a conversation about Tabarrok's book Launching the Innovation Renaissance. Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies.

Tabarrok's recommendations to increase innovation and productivity:

• prune back the patent system
• pay teachers better and in return demand better more accountable teachers - a more competitive, flexible, and open educational system
• focus education more on the STEM (science, technology, engineering, math) fields
• enable high-skilled immigration
• cut back on regulation
• invest in research and infrastructure - productive assets rather than welfare and warfare.

On intellectual property, he nails the problem head on:

Where you are building on previous ideas, standing on the shoulders of giants, then what you have to recognize is that previous intellectual property has veto power on new intellectual property. Intellectual property has two sides. Yes, it's an incentive to innovate. But it's also a cost. When you are building on previous intellectual property, it's a cost of innovation. Patents can be a cost of innovation as well as an incentive.

Tabarrok suggests a graduated system with 3-year, 15-year and 20-year patents and a narrowing of scope of the patents that are granted with the specific aim of allowing for cumulative innovation.

On education, Tabarrok worries that universities have become a status good - a consumption good, rather than a productive investment, especially for fields outside of the STEM fields, science, technology, engineering, math.

Computers are exploding, the Internet is exploding. And yet we graduated more students in computer science 25 years ago than we do today. [...] the same thing is true in mathematics and statistics, in chemical engineering.

How you fix that, I'm not sure. Subsidize those fields more and fluffier fields less? An engineering student pays 3k in tuition, but it costs 20k to study English Literature? That seems a little crass. On the other hand, I studied in a building paid for with Microsoft money. So, even if governments find it difficult to play favorites, industry can certainly sponsor fields selectively.

The one place where I might part ways with both Tabarrok and Roberts is the belief in deregulation.

One of the big influences on my thinking has been Mancur Olson's Rise and Decline of Nations. What Mancur Olson talks about is this accretion of interest groups over time. Everyone is trying to divide that pie up more and more in their favor, and it slows down decision-making.

It's not that I doubt the accretion of special interests. It's all around us. But, is deregulation the cure to that? Maybe they're right; regulation can certainly be a tool of rent-seekers.

Could we even build the Hoover Dam today? Technologically, yes. But politically could we have the will to do it? There would be so many environmental groups, so many lawyers, so many state and local governments, so many veto players.

But, deregulation can work out for worse, too. Take away Glass-Stegal, you get too-big-to-fail. Too much deregulation is an invitation to criminality and incompetence. Think of liar loans or the BP gulf oil spill. My own suspicion is that tilted rules are no good, no rules are no good, and sensible, well thought out, fairly and firmly enforced rules are really difficult and prone to failure, but are still the only serious option.

Venture capital comes up, briefly, in the context of it being stifled by Sarbanes-Oxley. I would pay a lot of attention to that system. Big companies are doing less basic research. In the pharmaceuticals industry, for instance, a big chunk of the early stage R&D has been outsourced from big-pharma to venture funded biotech. You might say, venture capital is the silver lining on this gilded age we're in. So, we better keep the venture system healthy or we'll have a lot less privately funded research going on.

It might be the case that the dilema the US finds itself in regarding innovation is a counterpart to what gets called the middle-income trap. In the high-income trap, the pie is so big that there's an enormous temptation to try to get a slightly bigger slice for ones-self. The relative effort of that is less then trying to grow an already huge pie bigger and the potential rents are juicy. Once that kind of thinking sets in, the social contract erodes and people loose faith.

I hope people in high places read Tabarrok's book. I hope they don't pay too much attention to the deregulation bit, and instead take seriously the challenging job of designing rules that make true innovation more rewarding than gaming the system.

More

• A discussion

Stop SOPA

In a matter of days, it looks likely that congress will pass SOPA (the Stop Online Piracy Act), another gift to special interest groups from motion picture and recording industry.

The bill targets sites like Sweden's The Pirate Bay, Hong Kong based MegaUpload or the Dutch site TorrentFreak requiring search engines, discussion forums, blogs and DNS providers to censor access to these types of sites prompting comparisons to China's great firewall.

The technical cluelessness on display in the congressional hearings is embarrassing, but, really, who expects anything different? Leading engineers have petitioned in opposition on the grounds that this legislation imposes serious burdens on infrastructure providers and probably won't even work.

How big a problem is this?

Technical issues aside, we should recognize that bootlegging movies or music is a fairly low-cost crime as far as society is concerned. Comparing it with illegal drugs, as The Economist does, is a joke when you think about lives wrecked by meth or crack or the ongoing drug war in Mexico. Piracy seems pretty benign next to the consequences of financial malfeasance in recent years, but now we're talking radical crazy talk.

The biggest consequence of piracy is that an artificial monopoly is less lucrative than it would otherwise be. Legal monopolies have a long history of abuse. They're a great way for politicians to give out favors and ask favors in return. In a textbook specimen of double-speak, any recognition of this economic and political reality is called sympathetic to piracy, something like being called a pinko in the McCarthy era.

A couple definitions

Rivalry is an economic concept describing whether the use of a good by one party precludes its use by another. The distinction being made here means that a million people could listen to Lady Gaga's latest tune at the same time. A million people could not ride in my car or live in my house. My house and car are rival goods. Songs are non-rival.

For every copyrighted work not pirated, how many would be purchased? My guess is that this ratio is low. I'm pretty sure nobody has convincingly shown otherwise. For the items not purchased, the utility of consuming them is lost, with no corresponding gain to the monopolist. This is called a dead weight loss, meaning some people could be made better off without making anyone else worse off, but we fail to do it. This loss is the music/movies/etc that wouldn't be enjoyed if they weren't pirated.

Willful ignorance of these simple but important ideas bugs me a lot more than bozo-grade technical knowledge.

Which is worse, the problem or the solution?

Now, it's important that creators of valuable intellectual property make a decent living. Few question that. What we're talking about is whether publishers should put up toll booths on the road between the consumer and the producer, and whether the government should enforce the use of these toll roads, when technology has made such choke points obsolete. Since distribution is now practically free, is it a good idea to create costly and ultimately ineffective legal barriers to replace the physical barrier that no longer exists?

Let's total up the costs. There's dead weight loss. There's a loss to innovation and culture which suffer when the interchange of ideas is impeded. There's the technical costs of implementing measures like SOPA, (and DRM and copy-protection before it), which tend to fall on paying customers.

To be fair, a partially market based means of valuing intellectual property and rewarding its creation is not to be dismissed lightly. Blocking access to download sites will result in some revenue trickling down to deserving artists. Too bad, no one speaks about the issue in terms of balancing benefits against costs.

The real problem

It's shameful that congress is so eager to shill for corporations and their lobbyists rather than protect the interests of the people they are elected to serve.

More on The Origins of Polical Order

Mark Kingwell, a University of Toronto political theorist, reviewed in Francis Fukuyam's The Origins of Political Order in the August 2011 edition of Harper's. I went to this review specifically looking for a left-leaning rebuttal, and I found one, but it wasn't exactly what I expected. The Tomist: Francis Fukuyama's infinite regression says plenty with which I can't agree, but also has some interesting insights.

Kingwell pulls a quote out of Origins that's underlined in my copy:

"Entrenched interest groups tend to accumulate in any society over time, which aggregate into rent-seeking coalitions in order to defend their narrow privileges."

The book gives the reader an appreciation for the constant erosion of political institutions by forces of narrow self-interest and short-term expedience, illuminating not just the origins of political order but its decay and decline as well.

Kingwell hits on a favorite theme of mine, the inseparability of politics and economics, calling it a "strange blind spot" in Fukuyama's thinking. In Kingwell's well-placed words:

"The central occlusion concerns the relation of politics and economics. [...] One reason political commentators consistently fail to understand the social order is that they enjoy the habitual exercise of concept-separation: driving a conceptual wedge between politics and markets, between democracy and capitalism."

Kingwell wonders, as many readers will, about the transformation of the author of The End of History and former neocon into the Fukuyama who wrote The Origins of Political Order. It seems to me, without having read the earlier work, that we get a more cautious and nuanced take on the subject from the newer book. I remember rolling my eyes at the title of Fukuyama's earlier work and the soon-to-be-short-lived triumphalism of the Washington consensus back in the 90's, even while supporting principles like free markets and free trade.

Remind me never to argue with Kingwell, lest I be pummeled with rhetorical zingers like this one: "Fukuyama's conclusion only gradually seeps through the masonry of his prose." Ouch. But, I found Fukuyama quite clear and readable, if not particularly florid.

Fukuyama, avoiding polemics, sets out to abstract factors of development away from specific political agendas. Ideology is shown as a tool for legitimating or delegitimating rulers and institutions, but no particular doctrine is espoused over another. Rather, the keys to a functional society and good governance are defined in technocratic terms of a strong state, rule of law and accountability.

Kingwell seems to resent this analytical detachment, calling Fukuyama's neutrality a "wearying evenness", as if inflammatory partisan ranting was in short supply. This is a baffling criticism. A muscular clash of "big ideas" might be more satisfying on some level but, that ignores the question of why the world is full of people quite enamored of big ideas about freedom, justice and equality whose governments conspicuously fail to practice anything of the sort.

The "turtles all the way down" story is a sticking point for Kingwell, who sites "unjustified force", "the violent structure of the founding act" as the ugly first cause down at the bottom of the chain of causation. That it may be, but the turtles story illustrates a completely different and equally interesting point. Like evolution, political development is not a deterministic process but a contingent one. If you could "rewind the tape" and run the experiment again, the results would likely be different. That this property is shared by complex systems as diverse as evolving organisms and systems of political economy is worth pondering. Perhaps, other emergent properties common to complex systems manifest themselves in political economy.

Whether it's mistrust in a reformed neocon or just academic cat-fighting, Kingwell doesn't like Fukuyama's book. As funny as they sometimes are, Kingwell's objections miss the central point that Fukuyama offers a framework for thinking systematically about politics and development, laying out several case studies for the reader to practice on and generalize from. The fact that he does this even handedly is to be commended.

The Origins of Political Order

I'm reading Francis Fukuyama's latest book, The Origins of Political Order, an ambitious survey of the development of political institutions and centers of power across civilizations. Sitting as we are, at a juncture between ascendent East and declining West, it's a good time to look back and extract some basic principles governing the rise and fall of civilizations.

Fukuyama starts off with instinctive human nature, the social and political baggage our species carries from our not-too-distant primate past. Primitive humans and other apes live in communities with definite social structure. But, up until recently, it was thought that primitive man was solitary. This view was held by enlightenment philosophers Thomas Hobbes and John Locke, originators of the theory of the social contract, and the idea of natural human rights, respectively. It's a bit discomfiting to consider that inaccurate ideas about the isolation of man in a state of nature strongly influence the American founding father's views on individualism.

In the time period covered by the book, up to the French Revolution, societies are mainly agrarian and structured into classes - a ruling nobility, land owning aristocracy, and peasantry. From this largely hereditary state, the middle class begins to emerge and modern states coalesce.

Fukuyama's three crucial characteristics of the modern state are a strong state, rule of law, and accountability. States successfully implementing all three of these institutions are generally free, prosperous, and stable. Fukuyama calls the process of reaching this happy balance getting to denmark.

Given these institutions and social classes, Fukuyama seeks to derive a theory of political development and decay - not a fully predictive theory, but a contingent theory, like evolution, dependent on historical accidents and circumstances.

Capable, accountable, rule-bound governments emerge when a delicate balance is struck between the classes / power centers. Absent this balance, various pathologies result in the form of dominance of one class or a coalition of classes against the others. Political systems rise, but they also decay. The rats always find a way in. "Over time, elites are able to protect their positions by gaming the political system [...] transmitting these advantages to their children through favored access to elite institutions"

The book builds its argument by surveying the history of political development in several countries. As a conscious effort to avoid Eurocentrism, China's early development of meritocratic bureaucracy is examined first. India, the Middle East, Europe and Russia follow. In each region, driven by agriculture, religion and warfare, political systems rise and fall striking different balances of power, always attended by the persistent reassertion of rent-seeking elites.

The Chinese state, which achieved a powerful state and meritocratic bureaucracy in Qin and Han dynasties around 200 BC, never succeeds in subordinating the state to rule of law. India develops rule of law and accountability, but with a weak central state. The Middle East gains and looses rule of law and accountability. In Russia, the rulers dominate unchecked by either law or any notion of accountability. The French monarchy was beholden to its aristocracy by debt, resulting in a weak central state and widespread corruption.

England is first to achieve all three ingredients. With the Magna Carta in 1215, the aristocracy obligated the monarchy to recognize their rights. Over time these rights came to apply increasingly widely across society, particularly to the rising middle class.

NO Freeman shall be taken or imprisoned, or be disseised of his Freehold, or Liberties, or free Customs, or be outlawed, or exiled, or any other wise destroyed; nor will We not pass upon him, nor condemn him, but by lawful judgment of his Peers, or by the Law of the land.

I might have been put off if I had known that the author was, at one time, associated with the neoconservative movement and had previously declared the "end of history". That would have been a shame. The Origins of Political Order is a fascinating read. The book is carefully constructed to avoid pushing ideological buttons, and makes its case largely independent of partisan politics. England and Denmark are held up as successful examples. The historical development proceeds from Chinese history first. I don't know my history well enough to evaluate the individual examples, but the framework for thinking about political development and centers of power seems to have a lot of value.

The planned second volume picks the story up in the modern age after the industrial revolution. Applying the same framework to the modern world is complicated by the post-colonial legacy, greatly increased communication, and globalization, along with entirely new actors such as corporations. It should be even more interesting than the first volume.

Reviews and commentary

On it's release, in April of 2011, the book generated lot of commentary, including write-ups in a slew of major newspapers, plus a bunch of blogs linked below. The author appears on several interview shows and podcasts. I'm going to hold off on all of this until after I finish the book, to give myself time to think about it.

• NY Times Francis Fukuyama’s Theory of the State
• Also from the NY Times: From ‘End of History’ Author, a Look at the Beginning and Middle
• Washington Post
• The Economist Theories of history: The good, the great and the gelded
• the Guardian
• Financial Times
• WSJ From Dynasty to Democracy Nations did not find stability, or sustained prosperity, until they became accountable to their citizens
• Slate

Interviews, audio and video

• Carnegie Council
• BookTV: Francis Fukuyama, The Origins of Political Order
• The Free Library Podcast
• New Books in History
• KQED forum
• NPR
• Francis Fukuyama & Jared Diamond

Other links

• Daniel Lende in PLOS Neuroanthropology Blog
• Fukuyama and Kuran
• Three Visions Of How The World Works
• China v America: The end of the end of history
• The Tomist: Francis Fukuyama's infinite regression in Harper's

The Slacker Economy

Recently, there's been a spate of articles about the virtues of slack, in this time of unemployment. CNN asks Are jobs obsolete? Thanks to automation and technology, the basic needs of society can be met using the productivity of a fraction of the population. So, the question becomes, what do the rest of us do?

So far, the answer seems to be the service economy, along with increasingly esoteric definitions of work and more frivolous things to spend money on. But, that runs out of steam, eventually. Most of us have too much to eat and all our time is spent working or consuming distracting amusements.

But, what if we're not driven to accumulate ever more marginally useful stuff, but rather reach a point where enough is enough. What, then, is the source of growth? In Work for post-materialists, the author confesses to being a “threshold earner”, as described by Tyler Cowen in The Inequality That Matters.

A threshold earner is someone who seeks to earn a certain amount of money and no more. [...] That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on.

In the old days, before I was a respectable family man, I used to work consulting gigs. That business attracts some sleazy characters, but that's another rant for another time. Anyway, for a stretch of a few years, I managed to get summers off. I prefer to think of myself as a gentleman hacker, but I guess that's another word for threshold earner.

[New York Times]

This phenomenon has a generational aspect to it. In The Experience Economy, David Brooks tells the tale of Sam, a hardworking American, born in 1900, who ran a business making brakes and his post-materialist grandson, Jared.

Sam’s grandson, Jared, was born in 1978. Jared wasn’t really drawn to the brake-systems business, which was withering in America. He works at a company that organizes conferences. He brings together fascinating speakers for lifelong learning. He writes a blog on modern art and takes his family on vacations that are more daring and exciting than any Sam experienced. Jared lives a much more intellectually diverse life than Sam. He loves Facebook, YouTube, Wikipedia and his iPhone apps. But many of these things are produced outside the conventional monetized economy. Most of the products are produced by people working for free. They cost nothing to consume.

But, while Jared is traipsing around the Burning Man festival in nothing but lime green body paint, someone has to do the dirty work. Soldiering, mining, cleaning hotel rooms, making car parts. Thinking about how we get some unfortunate people to do those unpleasant things in a world of overflowing plenty might not make you feel too good.

[Burning Man, Jim Urquhart/Reuters, Boston Globe]

Technology plays a role in generating high productivity in the first place, not to mention exaggerating inequality in the process, but also in providing cheap mostly-harmless virtual goods for us to consume. In 1996, William Gibson wrote The Net Is a Waste of Time. But, I've often had a different thought. The purpose of the internet is to absorb the excess productivity of mankind.

There's a lot to be said about the nature of work in the networked age: globalized, distributed, bursty. And thinking to be done about worthy purposes for all those liberated brain cycles. But, we'll leave those for later. In the meantime, I hope you're enjoying my non-remunerative contribution to the post-materialist slacker geek-fest gift economy that is the internet.

Who rules America?

An Investment Manager's View on the Top 1% contains a bunch of interesting factoids, mostly on what separates the working rich, the bottom half of the top 1% from the more elite fractions of the wealth distribution.

Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don't participate in the benefits big money enjoys. Those in the 99th to 99.5th percentile lack access to power.

...the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.

The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. They are, of course, doing nothing illegal.

Wall Street created the investment products that produced gross economic imbalances and the 2008 credit crisis. It wasn't the hard-working 99.5%. Average people could only destroy themselves financially, not the economic system. There's plenty of blame to go around, but the collapse was primarily due to the failure of complex mortgage derivatives, CDS credit swaps, cheap Fed money, lax regulation, compromised ratings agencies, government involvement in the mortgage market, the end of the Glass-Steagall Act in 1999, and insufficient bank capital. Only Wall Street could put the economy at risk and it had an excellent reason to do so: profit. It made huge profits in the build-up to the credit crisis and huge profits when it sold itself as "too big to fail" and received massive government and Federal Reserve bailouts. Most of the serious economic damage the U.S. is struggling with today was done by the top 0.1% and they benefited greatly from it.

This comes from a blog called Who rules America? in support of a book of same name, by G. William Domhoff, a sociologist at UC Santa Cruz. Interestingly, the link was posted on Hacker News. A comment referenced the theory of control-fraud, developed by William K. Black, author of The Best Way to Rob a Bank is to Own One.

White-collar criminology findings falsify several neo-classical economic theories. This paper discusses the predictive failures of the efficient markets hypothesis, the efficient contracts hypothesis and the law & economics theory of corporate law. The paper argues that neo-classical economists' reliance on these flawed models leads them to recommend policies that optimize a criminogenic environment for control fraud.

...which just goes to prove the point that you can't separate economics from politics. Susceptibility to corruption is a huge factor in the success or failure of economic systems, or more accurately systems of political economy.

Making the patent system even worse

The economist explains the state of the US patent system like this:

At a time when our future affluence depends so heavily on innovation, we have drifted toward a patent regime that not only fails to fulfill its justifying function, to incentivise innovation, but actively impedes innovation. We rarely directly confront the effects of this immense waste of resources and brainpower and the attendant retardation of the pace of discovery, but it affect us all the same. It makes us all poorer and helps keep us stuck in the great stagnation.

Congress is in the process of passing a "first-to-file system". It's hard to see this as anything but a gift to big corporations. Writing in Foreign Policy, Clyde Prestowitz calls the Americans Invent act, "...a bill likely to cut the heart out of our innovative, entrepreneurial culture...". Even the pro-patent group American Innovators for patent reform says,

American Innovators for Patent Reform is opposed to the America Invents Act and we urge the House of Representatives to draft an entirely new law that truly addresses what needs to be reformed. The America Invents Act was crafted by lobbyists for the large corporations that are notorious infringers of patents!

...and...

Canada made the switch to first-to-file in 1989, and a 2009 study from researchers at Canada’s McGill University’s Department of Economics found that the change “failed to stimulate Canadian R&D efforts” and “skewed the ownership structure of patented inventions towards large corporations, away from independent inventors and small businesses.

It looks like the US patent system is about to become even more screwed up.

Nice work as usual, congress.

BTW, Mimi & Eunice is a work of genius

More links

• The America Invents Act: First to File versus First to Invent? - Podcast