Paul Romer and The Great Stagnation

Today I downloaded Tyler Cowen’s new e-book The Great Stagnation for $4, along with Amazon’s Kindle app for Android. It’s got both the publishing and economics blogospheres all aflutter so I’m looking forward to the read. But what kind of blogger would I be if I didn’t comment first, read later?

Cowen had an op-ed a few weeks back in The New York Times that laid out his basic claim. Here’s one bit:

The numbers suggest that for almost 40 years, we’ve had near-universal dissemination of the major innovations stemming from the Industrial Revolution, many of which combined efficient machines with potent fossil fuels. Today, no huge improvement for the automobile or airplane is in sight, and the major struggle is to limit their pollution, not to vastly improve their capabilities.

Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living…

…Will the Internet usher in a new economic growth explosion? Quite possibly, but it hasn’t delivered very good macroeconomic performance over the last decade.

Cowen is brilliant, and I’m looking forward to the longer version of his argument, but I want to consider a more optimistic take on our economic moment by another brilliant economist, Paul Romer. What follows is from Romer, interviewed by libertarians Arnold Kling and Nick Schulz in their book From Poverty to Prosperity (which I can testify is valuable and interesting even to non-libertarians).


…this may be the most important question in human history: why have we had technological change and why has it been speeding up over time? …

…it may be inherent in the process of discovery that the more we learn the faster we can learn. It’s a notion that was captured by Newton when he said that he could see farther because he stood on the shoulders of giants. That was the first model that I tried for the speeding up phenomenon, that the more we learn the more we can learn…

…So it’s that kind of analysis, thinking of ideas as recipes – really, instructions for combining together small numbers of physical objects – that persuades, I think, anybody who works through the logic that the number of things we could have even tried up to this point in time is so small compared with the number of things that are possible, that we’re just extremely early in this discovery process. For as far as you want to project into the future of humans, we won’t run out of new things to discover. And as I conjectured in the beginning, it may even be that the more we learn about this process – the science of DNA, the science of materials, or our understanding of quantum mechanics – the more we learn about this stuff, the better we get at finding new, ever more valuable mixtures…

…The second-round answer, which I think may actually capture more of the truth, is that it may get easier to discover as you learn more things, or it may not, but what we’ve done is created better institutions over time so that we now exploit the opportunities much more effectively than we used to.

I believe Cowen wants to challenge this both on whether technological change has in fact been speeding up, and whether the technological changes we’ve seen recently are the same kind of economic game-changers we saw in the 20th century. I don’t know what role he would attribute to institutions. Which model is more accurate? I have no answer to that. But the Romer interview at least offers an alternative conceptual lens to Cowen’s. (You can read the full interview with Romer here.)

Cowen also argues that America has eaten up a lot of the “low-hanging fruit”, in education for instance, as described in the clip below:

It’s an interesting point. But once again for a more optimistic take I’ll point to Romer:

We’re going through this shift in the economy where the fraction of human effort that goes into actually physically rearranging things – bending metal, doing manufacturing, and so on – is going down over time and the fraction that’s going into discovering the right formula or recipe is going up over time. And that’s a really good thing, because all of the value really comes from finding the new recipes. If you picture the innovative activity of one hundred years ago and you think of it as U.S. Steel, most of the workers there were involved in literally bending or melting metal – doing the physical rearrangement – and a relatively small number of people were coming up with, say, better ways to extract iron from ore…

…So we’re going through this transformation where a larger and larger fraction of the labor force is engaged in problem-solving, sifting through possible ideas, and a relatively small fraction of people actually stamps out the pills or bends the metal.

(That bit combined with some other comments offers an interesting take on Julian Simon’s work, both approving and disapproving of his work on population and innovation.)

So in education the question may be whether we can innovate fast enough to outpace declining marginal student aptitude. Romer’s model suggests that as more minds spend time thinking about how we educate, rather than spending that time grading tests, passing out papers, etc., that innovation could speed up. Cowen’s suggests that each student we attempt to get through school is likely to be harder than the last. Will more minds working on better educational recipes mean better education, and therefore more minds devoted to finding other useful recipes? Or have we already eaten all the low-hanging fruit?

Perhaps I’ll have more to say after I finish Cowen’s book.


Age of the Winklevi

Vanity Fair published a piece this week on a lawsuit against the Huffington Post by two Democratic political consultants “for failing to acknowledge what they claim was their critical role in the creation of the Huffington Post”. Politico reported the story about two months ago under the headline “2 Dems claim Arianna Huffington stole website idea”.winklevoss

Wait, what?  What exactly was the “idea” for the Huffingon Post?

According to VF, “[plaintiffs] Daou and Boyce say that they were the ones who conceived of ‘a Democratic equivalent of the Drudge Report'”.  If that doesn’t exactly sound like an idea you can steal, that’s because it isn’t.

The actual charge, reports Politico, is “that Huffington and partner Ken Lerer designed the website from a plan [Daou and Boyce] had presented them, and in doing so, violated a handshake agreement to work together.”

This is a strange case, and commenters are already expressing skepticism about the strength of the plaintiffs’ claim, but I’ll defer to lawyers on whether or not any contract was breached.

What disturbs me most about this case is how it’s been presented.  The idea for a liberal Drudge just is not the kind of idea that is protected by our intellectual property regime, and for good reason.  Though the case actually seems to revolve around breach of contract, you wouldn’t necessarily gather as much from how it’s presented in the media.  The Politico headline, in particular, obscures the real issue.

Why does this matter?  My fear is that in the age of constant suits over intellectual property (music, film), and high profile suits that may seem to be about intellectual property (against Facebook or Huffington), we might forget that not every idea is protected by law, and that that is a good thing! Ideas that are protected by law are rightfully the exception, not the rule.

Lawrence Lessig explains how to think about this in The Future of Ideas.  I wish everyone who read the Vanity Fair piece would also read this:

This is a hard fact for lawyers to understand (protected as they are by exclusionary rules such as the bar exam), but most of production in our society occurs without any guarantee of government protection. Starbucks didn’t get a government monopoly before it risked a great deal of capital to open coffee shops around the world. All it was assured was that people would have to pay for the coffee they sold; the idea of a high-quality coffee shop was free for others to take. Similarly, chip fabricators around the world invest billions in chip production plants, with no assurance from the government that another competitor won’t open a competing plant right next door.

In each of these cases, and in the vast majority of cases in a free economy, one person’s great idea is open for others to take. Burger King and McDonald’s; Peet’s Coffee and Starbucks; Peapod and Webvan. No doubt the first movers would like it if others couldn’t use their idea or if others wouldn’t notice their idea until long after a market is set. But it is in the nature of the limits on patent rights, and in the nature of transparency in the market, that innovators in the ordinary market can’t keep their good ideas to themselves.

Some protection for ideas, and a bit more for expression, is provided by the legal system. But this protection is incomplete or leaky. Perfect control is never its character.

Innovators nonetheless innovate. And they innovate because the return to them from deploying their new idea is high, even if others get the benefit of the new idea as well. Innovators don’t simply sit on their hands until a guaranteed return is offered; real capitalists invest and innovate with the understanding that competitors will be free to take their ideas and use them against the innovators.

Thus, rather than puzzling about why anyone would code for free systems, we might as well puzzle about why anyone would innovate without a government-granted monopoly to protect them. Indeed, history will teach that, at an earlier time, this was very much the view. Mercantilists believed that exclusive rights were needed before any investment made sense; the English monarchy at an earlier time protected many ordinary investments through a state-backed monopoly.

Free markets, however, function on a very different basis. We don’t grant every merchant a guaranteed market; we don’t reward every new marketing plan with a twenty-year monopoly; we don’t grant exclusive rights to each new way of doing business. In all these cases, because the market produces enough incentive on its own, the fact that others can free-ride doesn’t kill innovation. (The Future of Ideas, pgs 70-71)


Why go to TED?

It may seem like a stupid question.  Why not go to TED, if you could?  It’s full of brilliant and influential people.  And celebs, if you’re into that.  Anyone who’s ever watched a TED talk knows how thought-provoking they are and how addictive watching them can become.

So why not go to TED?

Well this post by Josh Macht at Harvard Business Review got me thinking…

But why is TED so different? Partly it comes from the A-list speakers, including Bill Clinton and Bono. But I suspect it’s the variety of speakers, not the status of the headliners, that provides TED with its real fervor.

In particular it was this bit that jumped out at me:

“Prepare to have your mind blown,” says one eager TEDster while waiting in line to get our TED gift bags on the evening of the big conference.

And, again, maybe this doesn’t strike you as odd.  Wouldn’t it be mind-blowing?

I’m not so sure.  After all, what are they going to tell me that’s so special?  Not that I already know it all – I most certainly do not – but rather what are they going to convey in person that I couldn’t otherwise learn?

The talks themselves are available either live or after the fact on the TED site.  Many if not most of the presenters write books and articles, maintain blogs, or post updates on Twitter.

More generally, I have access through Twitter and my RSS reader to a diverse cross-section of the world’s brightest thinkers.  Jumping from a post by Tyler Cowen to a video by Lawrence Lessig and then over to Clay Shirky’s Twitter feed doesn’t leave much time to wish someone would organize a conference for me to hear interesting ideas.

And so what I wondered about the eager TEDster was whether he was even paying attention.

Is the TEDster oblivious to the wealth of content freely available and one good filter away?

Of course, I’d love to attend TED if given the chance. And obviously there are elements of the conference that one experiences by being there that I just can’t experience at home.

But why wait for an annual conference to get your mind blown when you can do it, for free, every day?