Monthly Archives: February 2014

A fine innovation economist

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A few days ago Suzanne Scotchmer died. There have been a couple of warm appreciations of her and her work on innovation economics from Joshua Gans and Joel West. Her particular contribution was the argument, well supported by evidence, that the patent system does not incentivise cumulative innovation at all well because it does not share the returns to innovation between the first step and subsequent steps in the cumulative process. In a growing number of instances, such as biotech or digital technologies, successful innovation takes exactly this cumulative form.

I knew Suzanne when I was a graduate student at Harvard in the early 1980s and she was a young assistant professor. Then, as now, economics was very male-dominated and it was unspeakably encouraging to have a female role model who was highly supportive of students – and a normal human being too, warm, funny, with outside interests. (Juliet Schor was another who was at around the same time. Maybe it’s a lapse of my memory but I can’t remember any other women professors in the department at the time.) I last saw Suzanne at the 2009 Global Economic Symposium, when we shared a panel.

Shame on me, I’ve not read her 2004 book [amazon_link id=”0262693437″ target=”_blank” ]Innovation and Incentives[/amazon_link].

[amazon_image id=”0262693437″ link=”true” target=”_blank” size=”medium” ]Innovation and Incentives[/amazon_image]

Her 1991 Journal of Economic Perspectives paper, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law (1991:1, pp 29-41), is well worth reading – it’s a free download. She notes that if the second inventor has some market power, prior agreements to share revenues can overcome the drawback of patent-based incentives. Defining patents quite narrowly can also help. However, she also argues that the problem supports the case for government funding of basic research made freely available to subsequent innovators, without patenting. Here is the conclusion:

“Patent policy is a very blunt instrument trying to solve a very delicate problem. Its bluntness derives largely from the narrowness of what patent breadth can depend on, namely the realized values of the technologies. As a consequence, the prospects for fine-tuning the patent system seem limited, which may be an argument for more public sponsorship of basic research.”

Suzanne’s death is a sad loss.

Global governance by stealth

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Last night I attended the Dimbleby Lecture given by IMF Managing Director Christine Lagarde – it will be broadcast tonight on BBC1. Her theme was reinventing multilateralism for the 21st century. What global governance structures will ensure the international system delivers mutually beneficial co-operation rather than zero-sum competition, in the face of technologies that are creating an ever-denser web of decentralised connections, significant demographic change and long-term and other environmental challenges? She also underlined the serious challenge to stability posed by the current degree of income inequality. I think all reasonable people would agree with that, but how interesting to hear the head of the International Monetary Fund speak about it in such strong terms:

“Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”

Her focus on reform of global governance is understandable when the US Congress recently made America pretty much the only country in the world that has failed to ratify a first step IMF funding proposal. As Mohamed El-Erian wrote for Project Syndicate:

“This is an unfortunate and regrettable outcome for both the IMF and the international community as a whole. Congressional obstinacy is forcing the Fund to miss out on an opportunity to strengthen its finances at a time when most other countries have already approved the initiative. It is also being held back from addressing, albeit modestly, governance and representation deficits that have steadily eroded the integrity, credibility, and effectiveness of this important multilateral institution.”
Nobody I know of believes global institutions do not need reform. Apart from the challenges described by Mme Lagarde, the large, growing economies – the BRICs and then the MINTs – urgently need to have a voice that reflects the weight they already have in the world economy, as Jim O’Neill has argued in his book The [amazon_link id=”1907994130″ target=”_blank” ]BRIC Road to Growth[/amazon_link]. A forthcoming (May)  book by Ian Goldin, [amazon_link id=”0691154708″ target=”_blank” ]The Butterfly Defect[/amazon_link], looks specifically at how to manage the serious new systemic risks posed by global interconnectedness, such as pandemics or new financial catastrophes. These are just two of a whole sub-genre.
[amazon_image id=”0691154708″ link=”true” target=”_blank” size=”medium” ]The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It: How Globalization Creates Systemic Risks, and What ot Do about it[/amazon_image]
So the need is clear. But how to get from here to there? I’ve not yet heard or read about the specifics. My hunch is that if the minor reform of existing institutions is impossible, given the almost-everywhere increasingly dysfunctional politics of different nation states, we need to look at building new institutions that can perhaps start under the radar. It could be global governance reform by stealth or not at all.

Implementation, implementation, implementation

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Over the years I’ve spent a lot of time in different non-executive public service jobs, and so have experience of two interfaces. One is between politics and non-political public service decisions, all at the technocratic end in my case. The other is between non-executive and executive action, as all of the non-exec roles have obviously relied on a full time staff to implement decisions.

Almost all of the people I’ve come across in all of these categories have felt a strong sense of public service. But it is extremely difficult going from a political choice validated (more or less) by accountability to voters to the effective implementation of those choices with accountability that is often not clear although often addressed by ‘transparency’. These categories of actors have different time scales  – from the electoral cycle to the life-long career – and constraints –  from media and electoral demands to the risk of judicial review. (The piggy in the middle position is not the most comfortable, either!) As the Duke of Wellington famously said of his first cabinet meeting, “An extraordinary affair. I gave them their orders and they wanted to stay and discuss them.” (Or as one of my favourite t-shirts, long since gone, put it: “Be reasonable. Do it my way.”)

Recently I read [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe, an excellent and very readable account of many specific failures, along with an analysis of why failure occurs so often. They attribute chaotic government (this is in the UK) to a mixture of human errors and system errors.

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

Now I’m half way through a proof copy of [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails so Often and How It Can Do Better[/amazon_link] by Peter Schuck. (I’ll review it in April when it’s officially published.) This is a US-focused book, more academic in tone. Its analysis overlaps with King and Crewe. Like them, Schuck goes on to suggest some improvements that would ameliorate the dysfunctionality of government – and my goodness, the US system looks massively dysfunctional to a foreigner like me.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

The two books together are making me wonder what the prospects are for making government truly effective given our starting point, namely the accumulation of bad policies like encrusted barnacles making an old ship impossible to sail. A lot of economists are pinning their hopes on evidence-based policy, but this assumes that Mr Spock-style rationality will cut through the nexus of many people taking varied decisions for different reasons.

It’s better than not having the evidence base, but we economists need to pay more careful attention to the political economy issues (and, as I’ve argued before in last year’s Pro Bono Economics lecture, make sure we include ourselves in the analysis.)

Would Keynes see Fox News as progress?

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The economics profession has a less than stellar reputation for its forecasting ability, so asking some economists to make predictions for a hundred years from now is a bold move. Yet that’s what Ignacio Palacios-Huerta did for[amazon_link id=”0262026910″ target=”_blank” ] In 100 Years: Leading Economists Predict the Future.[/amazon_link]

One of the inspirations that led him to invite mainly US-based, highly eminent economists such as Daron Acemoglu, Robert Shiller and Robert Solow to think so far ahead was the famous 1930 Keynes Essay, [amazon_link id=”B00HRDZL5C” target=”_blank” ]Economic Possibilities for our Grandchildren[/amazon_link], and it is a starting point for several of the contributions. So, not surprisingly, a common theme is the likelihood of continuing technology-driven improvements in living standards, health and longevity in the long term – despite the clear short-term challenges. But another common theme to many of the essays is one not on Keynes’s horizon, namely the unknown but potentially catastrophic risks posed by climate change. I think many people who dismiss economics as not taking environmental issues seriously might be surprised about how many of these contributors address the question.

Overall, the tone of the essays is generally positive – Andreu Mas-Collel argues that economics should be called, not the ‘dismal science’ but the ‘cautiously optimistic science’. However, none of the economists ignores the reasons for pessimism. Apart from climate change and environmental pressures, they differ more in their pessimism than in their optimism. Daron Acemoglu focuses on ‘counter-Enlightenment’ fundamentalisms or other anti-modernist movements as a political force that will run counter to continuing progress.

In the most interesting essay in the book Ed Glaeser – an economist who has always worked creatively in the areas where economics borders the other social sciences – raises the possibility of social fragmentation in what he calls the ‘self-protection’ society. In addition to the fragilities that come with global interconnectedness – pandemics, terrorism and so on – he writes: “One recurring fear is that this prosperity will produce a self-protective society, more interested in keeping what it has than in creating change. Human kind has become wealthier precisely because we have taken risks.”

He also in this essay brings us the eye-opening fact that on average Americans spend almost as much time watching TV (2.83 hours a day) as working (3.2 hours a day) – as he comments wryly: “It seems quite possible that the recent technological change that has created the most benefit is the proliferation of cable channels.” Whether this is progress or not is another question. What would Keynes have made of Fox News or HBO?

Changing the world line by line

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The FT today has an article about the creativity of computer code, which includes this wonderful quotation from Ada Lovelace:

“The Analytical Engine does not occupy common ground with mere ‘calculating machines,’ ” she wrote elsewhere. “It holds a position wholly its own … A new, a vast, and a powerful language is developed … in which to wield its truths so that these may become of more speedy and accurate practical application for the purposes of mankind than the means hitherto in our possession have rendered possible. Thus not only the mental and the material, but the theoretical and the practical in the mathematical world, are brought into more intimate and effective connexion with each other.”

The feature is an extract from Vikram Chandra’s [amazon_link id=”0571310303″ target=”_blank” ]Geek Sublime: Writing Fiction, Coding Software[/amazon_link], which sounds intriguing on the basis of the article.

It’s many years since I had to write code – it was Fortran in the early 1980s – other than bits of HTML for fun. But I always enjoyed it and certainly occasionally experienced that sense of flow you get from absorption in a creative experience. In a way, code can be more creative than natural languages because it has to operate within the strict constraint of formal logic.

Chandra ends here:

“But programs are not just algorithms as concepts or applied ideas; they are algorithms in motion. Code is uniquely kinetic. It acts and interacts with itself, with the world. In code, the mental and the material are one. Code moves. It changes the world.”

[amazon_image id=”0571310303″ link=”true” target=”_blank” size=”medium” ]Geek Sublime: Writing Fiction, Coding Software[/amazon_image]