Monday, February 27, 2012

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 educational 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. VC and corporate research budgets skew largely toward product development rather than basic research. Even so, we'd better keep the venture system healthy or we'll have a lot less privately funded research of any kind 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.


A political economy

A recent piece in the Economist ( A new anthology of essays reconsiders Thomas Piketty’s “Capital” , May 20, 2107) ends with these words: &q...