Very nice column from one of my favorite Nobel prize winning economists. Stiglitz explains some of the ways in which patent protection impedes growth and increases inequality.
It’s great to see Stiglitz raising alternatives to patents for financing research, but I would disagree with the prize for patent buyouts that he proposes as being the best alternative. I have always preferred a system of direct upfront funding, which could be done through private firms operating on long-term contracts. In response to a number of requests, here is the argument in brief. (Here‘s a little longer discussion.)
First, I doubt very much that the prizes will typically go to the right person. As we know, and Stiglitz writes in his piece, innovation is inevitably a cumulative process. If we allow people to get patents and then have them bought up for a prize and put in the public domain, I have little confidence that we will typically give our prize to the person or company that had the key innovation. There may well be a situation where a great innovation brought research 99 percent of the way to the final product, but the main innovator was blind to the last simple step. A patent buyout system is likely to reward the last simple step, not the innovation that got us 99 percent of the way there.
I am well aware of the ideology that says we have to be able to find the “best” innovator, but this is just an ideology. Years ago when I was teaching, we had a small prize that went to the best undergrad econ major. Half of the faculty had one student who they considered outstanding, the other half had another student. There was no one who had both students. For some reason the prize could not be shared.
I proposed flipping a coin. Everyone laughed assuming that this was a joke. When I insisted that I was serious and that we had no rational basis for resolving this through discussion, my friends on the faculty politely dismissed my suggestion implying that it was close to crazy. Eventually, the louder voices got their candidate the prize.
This was a simple case, but that is the way it works all the time in the real world. Do we really think that it’s important we hand large prizes (e.g. billions or tens of billions of dollars) to a person or company who we will credit with an innovation for which they may not deserve credit?
The other problem with a prize system is that it encourages secrecy in the research process before the prize is awarded. In order to have the best claim to getting a prize, researchers would not share their results until they have a patentable product. This could lead to much duplicative research and many pointless deadends. By contrast, if a condition of getting upfront funding is that all research results are made public as soon as practical then research should be able to advance far more quickly.
We could still have prizes in this system, but they would be secondary compensation like Professor Stiglitz’s Nobel Prize. While I’m sure Stiglitz was happy to pocket a million plus dollar prize, he had already been paid for his work. Even if the Nobel committee had overlooked his contributions to economics, he need not have worried about going home without a paycheck.
Similarly, in a system of publicly funded research there is no reason not to include funding for many Nobel-type prizes. If someone has a great breakthrough in the treatment of cancer, malaria, or some other major disease, why not give this person $5 million or $10 million? But the point would be that their paycheck would not hinge on having a patent that the prize committee would then decide was worth some vast sum.
Anyhow, that’s my two cents on the topic, but the key point is that we need to have the discussion. The abuses of the patent system are a daily occurrence. They cost lives, slow growth, and increase inequality. It’s great that Stiglitz has raised the topic and that the NYT has run his piece.
Very nice column from one of my favorite Nobel prize winning economists. Stiglitz explains some of the ways in which patent protection impedes growth and increases inequality.
It’s great to see Stiglitz raising alternatives to patents for financing research, but I would disagree with the prize for patent buyouts that he proposes as being the best alternative. I have always preferred a system of direct upfront funding, which could be done through private firms operating on long-term contracts. In response to a number of requests, here is the argument in brief. (Here‘s a little longer discussion.)
First, I doubt very much that the prizes will typically go to the right person. As we know, and Stiglitz writes in his piece, innovation is inevitably a cumulative process. If we allow people to get patents and then have them bought up for a prize and put in the public domain, I have little confidence that we will typically give our prize to the person or company that had the key innovation. There may well be a situation where a great innovation brought research 99 percent of the way to the final product, but the main innovator was blind to the last simple step. A patent buyout system is likely to reward the last simple step, not the innovation that got us 99 percent of the way there.
I am well aware of the ideology that says we have to be able to find the “best” innovator, but this is just an ideology. Years ago when I was teaching, we had a small prize that went to the best undergrad econ major. Half of the faculty had one student who they considered outstanding, the other half had another student. There was no one who had both students. For some reason the prize could not be shared.
I proposed flipping a coin. Everyone laughed assuming that this was a joke. When I insisted that I was serious and that we had no rational basis for resolving this through discussion, my friends on the faculty politely dismissed my suggestion implying that it was close to crazy. Eventually, the louder voices got their candidate the prize.
This was a simple case, but that is the way it works all the time in the real world. Do we really think that it’s important we hand large prizes (e.g. billions or tens of billions of dollars) to a person or company who we will credit with an innovation for which they may not deserve credit?
The other problem with a prize system is that it encourages secrecy in the research process before the prize is awarded. In order to have the best claim to getting a prize, researchers would not share their results until they have a patentable product. This could lead to much duplicative research and many pointless deadends. By contrast, if a condition of getting upfront funding is that all research results are made public as soon as practical then research should be able to advance far more quickly.
We could still have prizes in this system, but they would be secondary compensation like Professor Stiglitz’s Nobel Prize. While I’m sure Stiglitz was happy to pocket a million plus dollar prize, he had already been paid for his work. Even if the Nobel committee had overlooked his contributions to economics, he need not have worried about going home without a paycheck.
Similarly, in a system of publicly funded research there is no reason not to include funding for many Nobel-type prizes. If someone has a great breakthrough in the treatment of cancer, malaria, or some other major disease, why not give this person $5 million or $10 million? But the point would be that their paycheck would not hinge on having a patent that the prize committee would then decide was worth some vast sum.
Anyhow, that’s my two cents on the topic, but the key point is that we need to have the discussion. The abuses of the patent system are a daily occurrence. They cost lives, slow growth, and increase inequality. It’s great that Stiglitz has raised the topic and that the NYT has run his piece.
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The NYT ran an interesting piece on the problems of clinical testing. At the end of the piece it suggests a better alternative to patent financed clinical trials. The alternative involves the simultaneous testing of multiple drugs. These trials are being conducted by a consortium supported by the National Institutes of Health and the Food and Drug Administration, among others. (If the takers didn’t call the shots, the drugs approved as a result of this process would all be available as generics. Needless to say, the drug companies probably have this arranged so that the government provides the service for free.)
The NYT ran an interesting piece on the problems of clinical testing. At the end of the piece it suggests a better alternative to patent financed clinical trials. The alternative involves the simultaneous testing of multiple drugs. These trials are being conducted by a consortium supported by the National Institutes of Health and the Food and Drug Administration, among others. (If the takers didn’t call the shots, the drugs approved as a result of this process would all be available as generics. Needless to say, the drug companies probably have this arranged so that the government provides the service for free.)
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That is what readers of this interview by Binyamin Appelbaum with Stephen King must be wondering. King’s main point is that growth is grinding to a halt and we are facing an era of prolonged stagnation. Okay, how does this fit with the story that we will see mass unemployment because robots will do all the work?
The answer is that it doesn’t fit at all. The weather person on channel 5 told just told us that it will 95 degrees and sunny, while the weather person on channel 9 told us to expect blizzards and sub-zero weather.
This is the state of economic debate in the United States. If either of these views are right, then the people arguing the other one are out of their gourds. Yet in this great country, both views are exposed side by side in elite circles, probably even by the same people.
This says everything anyone needs to know about the quality of economic debate. It is complete nonsense. Policy is designed of, by, and for the powerful, end of story. If we can’t do anything about policy, why don’t we just save a few bucks and fire all the damn economists. Let’s shut down the econ departments in universities, the Fed’s research department, the I.M.F., the OECD. Let’s get real, no one cares about economics, they are just going to pursue the policies they want to follow.
(Yes, I’m happy to go too. If we get rid of the rest of the bastards, I would gladly spend the rest of my days shoveling poop in dog shelters.)
That is what readers of this interview by Binyamin Appelbaum with Stephen King must be wondering. King’s main point is that growth is grinding to a halt and we are facing an era of prolonged stagnation. Okay, how does this fit with the story that we will see mass unemployment because robots will do all the work?
The answer is that it doesn’t fit at all. The weather person on channel 5 told just told us that it will 95 degrees and sunny, while the weather person on channel 9 told us to expect blizzards and sub-zero weather.
This is the state of economic debate in the United States. If either of these views are right, then the people arguing the other one are out of their gourds. Yet in this great country, both views are exposed side by side in elite circles, probably even by the same people.
This says everything anyone needs to know about the quality of economic debate. It is complete nonsense. Policy is designed of, by, and for the powerful, end of story. If we can’t do anything about policy, why don’t we just save a few bucks and fire all the damn economists. Let’s shut down the econ departments in universities, the Fed’s research department, the I.M.F., the OECD. Let’s get real, no one cares about economics, they are just going to pursue the policies they want to follow.
(Yes, I’m happy to go too. If we get rid of the rest of the bastards, I would gladly spend the rest of my days shoveling poop in dog shelters.)
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The NYT had an article about how French consumers are cutting back on their spending, hurting retailers and the economy. The piece notes that unemployment is rising and that the French economy is struggling to recover from its second recession since the 2008 collapse.
It would have been worth mentioning that this is a direct and predictable outcome of the government’s austerity policies. The government has cut spending and raised taxes. This directly reduces demand in the economy. Unless the government’s cutbacks somehow inspire consumers to spend more, businesses to invest more or foreigners to buy more French goods, they will lead to slower growth and higher unemployment.
As this article implies and research from the I.M.F. and others demonstrate, government austerity has not helped to boost the private sector. The article should have explained the role of government policy in the situation it describes. Presumably if there had been a surge in inflation following a big government spending spree the NYT would have made the connection rather than just noting higher prices in stores.
The NYT had an article about how French consumers are cutting back on their spending, hurting retailers and the economy. The piece notes that unemployment is rising and that the French economy is struggling to recover from its second recession since the 2008 collapse.
It would have been worth mentioning that this is a direct and predictable outcome of the government’s austerity policies. The government has cut spending and raised taxes. This directly reduces demand in the economy. Unless the government’s cutbacks somehow inspire consumers to spend more, businesses to invest more or foreigners to buy more French goods, they will lead to slower growth and higher unemployment.
As this article implies and research from the I.M.F. and others demonstrate, government austerity has not helped to boost the private sector. The article should have explained the role of government policy in the situation it describes. Presumably if there had been a surge in inflation following a big government spending spree the NYT would have made the connection rather than just noting higher prices in stores.
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How concerned are you that the House farm bill would spend $195 billion on farm subsidies over the next decade? How about the baseline of $740 billion for spending on food stamps. Would you be more or less concerned if the numbers were $19.5 billion and $74 billion? Would you have any idea what these numbers mean?
The government is projected to spend $47.2 trillion over the next decade. This makes the farm subsidies equal to 0.4 percent of projected spending. The $740 billion figure for food stamps would be less than 1.6 percent of projected spending. The Post article on the bill would have provided much more information to readers if it had expressed the spending figures as a share of the budget rather than as dollar amounts that have almost no meaning to anyone.
How concerned are you that the House farm bill would spend $195 billion on farm subsidies over the next decade? How about the baseline of $740 billion for spending on food stamps. Would you be more or less concerned if the numbers were $19.5 billion and $74 billion? Would you have any idea what these numbers mean?
The government is projected to spend $47.2 trillion over the next decade. This makes the farm subsidies equal to 0.4 percent of projected spending. The $740 billion figure for food stamps would be less than 1.6 percent of projected spending. The Post article on the bill would have provided much more information to readers if it had expressed the spending figures as a share of the budget rather than as dollar amounts that have almost no meaning to anyone.
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That is what readers of his column on the state of the world economy will conclude. He told readers:
“Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations.”
Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It’s amazing that Samuelson somehow missed the crisis.
In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.
There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about “costly welfare states,” the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countries with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.
Samuelson also implies that there is some great harm in the trade deficits that India is running. India has had trade deficits in recent years of around 5 percent of GDP. This is quite sustainable for a country experiencing the sort of growth that India has been seeing and in fact exactly what standard economic theory would predict. By contrast, trade deficits of this size in a relatively slow growing country like the United States is a more serious issue.
That is what readers of his column on the state of the world economy will conclude. He told readers:
“Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations.”
Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It’s amazing that Samuelson somehow missed the crisis.
In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.
There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about “costly welfare states,” the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countries with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.
Samuelson also implies that there is some great harm in the trade deficits that India is running. India has had trade deficits in recent years of around 5 percent of GDP. This is quite sustainable for a country experiencing the sort of growth that India has been seeing and in fact exactly what standard economic theory would predict. By contrast, trade deficits of this size in a relatively slow growing country like the United States is a more serious issue.
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The folks in Italy must be pretty happy. After years of being forced to worry about deficits the NYT told readers:
“Faced with record unemployment and a public debt of more than €2 billion, or $2.6 billion, the grand coalition was already under pressure for the slow pace of its reforms.”
That would be great news since the NYT’s numbers imply that Italy’s debt is just over 0.1 percent of GDP. According to the IMF, Italy’s debt is more than 2.0 trillion euros, more than 130 percent of GDP.
Of course the numbers in the NYT are a mistake. It wrote “billions” when it meant “trillions.” This sort of thing can happen, but it does raise the question of why the NYT thought it was clever to write “trillions” rather than write 130 percent of GDP. While a reporter or editor should have recognized the typo in writing billions, it is almost inconceivable that someone would not have recognized the typo if the paper had written that Italy had a debt of 0.1 percent of GDP.
It is worth noting that this is not the first time that a mistake like this has made its way into print or at least cyberspace in the NYT. Just a few weeks ago a NYT article told readers that food stamps are a $760 billion program. That might have surprised the small group of readers familiar with actual spending on the program, since the correct number is $76 billion for 2013. (The NYT did subsequently correct this mistake.)
The point is not just to mock the NYT for what are in fact egregious errors. (Sorry, missing the size of Italy’s debt by three orders of magnitude is pretty bad.) The point is why on earth is it a standard in budget reporting to express budget figures in numbers that are apparently meaningless even to the people who write them, when they could very easily be expressed as percentages that would be meaningful to the vast majority of readers.
Almost all NYT readers would understand that the food stamp program in 2013 is roughly 1.8 percent of the budget. Almost none know what it means to spend $76 billion on the program. If the point is to inform readers, then the paper would express the number in percentage terms, end of story. The only reason to express numbers as dollar (or euro) amounts is to mindlessly follow a fraternity ritual. (This is what budget reporters do.)
It is understandable that people who want to promote confusion about the budget — for example convincing people that all their tax dollars went to food stamps — would support the current method of budget reporting. It is impossible to understand why people who want a well-informed public would not push for changing this archaic and absurd practice.
Addendum:
The NYT corrected the number around 10:00 P.M. on the 11th.
The folks in Italy must be pretty happy. After years of being forced to worry about deficits the NYT told readers:
“Faced with record unemployment and a public debt of more than €2 billion, or $2.6 billion, the grand coalition was already under pressure for the slow pace of its reforms.”
That would be great news since the NYT’s numbers imply that Italy’s debt is just over 0.1 percent of GDP. According to the IMF, Italy’s debt is more than 2.0 trillion euros, more than 130 percent of GDP.
Of course the numbers in the NYT are a mistake. It wrote “billions” when it meant “trillions.” This sort of thing can happen, but it does raise the question of why the NYT thought it was clever to write “trillions” rather than write 130 percent of GDP. While a reporter or editor should have recognized the typo in writing billions, it is almost inconceivable that someone would not have recognized the typo if the paper had written that Italy had a debt of 0.1 percent of GDP.
It is worth noting that this is not the first time that a mistake like this has made its way into print or at least cyberspace in the NYT. Just a few weeks ago a NYT article told readers that food stamps are a $760 billion program. That might have surprised the small group of readers familiar with actual spending on the program, since the correct number is $76 billion for 2013. (The NYT did subsequently correct this mistake.)
The point is not just to mock the NYT for what are in fact egregious errors. (Sorry, missing the size of Italy’s debt by three orders of magnitude is pretty bad.) The point is why on earth is it a standard in budget reporting to express budget figures in numbers that are apparently meaningless even to the people who write them, when they could very easily be expressed as percentages that would be meaningful to the vast majority of readers.
Almost all NYT readers would understand that the food stamp program in 2013 is roughly 1.8 percent of the budget. Almost none know what it means to spend $76 billion on the program. If the point is to inform readers, then the paper would express the number in percentage terms, end of story. The only reason to express numbers as dollar (or euro) amounts is to mindlessly follow a fraternity ritual. (This is what budget reporters do.)
It is understandable that people who want to promote confusion about the budget — for example convincing people that all their tax dollars went to food stamps — would support the current method of budget reporting. It is impossible to understand why people who want a well-informed public would not push for changing this archaic and absurd practice.
Addendum:
The NYT corrected the number around 10:00 P.M. on the 11th.
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It might have been worth reminding readers of this fact since it seemed that Speaker John Boehner had forgotten it. A NYT article on the Obama administration’s decision to rely largely on individual’s self-reporting of their eligibility for employer provided insurance when awarding subsidies through the health care exchanges includes a quote from Boehner:
“The president’s decision to use the honor system to hand out subsidies, I think, exposes taxpayers to massive fraud and abuse.”
The government relies on small business owners to truthfully report their income for tax purposes. There is vastly more money at stake in the taxes owed by small businesses than the subsidies for people who lack insurance. If Speaker Boehner believes that many people would lie to get an insurance subsidy then he must believe that small businesses cheat the government out of hundreds of billions of dollars a year in taxes.
It might have been worth reminding readers of this fact since it seemed that Speaker John Boehner had forgotten it. A NYT article on the Obama administration’s decision to rely largely on individual’s self-reporting of their eligibility for employer provided insurance when awarding subsidies through the health care exchanges includes a quote from Boehner:
“The president’s decision to use the honor system to hand out subsidies, I think, exposes taxpayers to massive fraud and abuse.”
The government relies on small business owners to truthfully report their income for tax purposes. There is vastly more money at stake in the taxes owed by small businesses than the subsidies for people who lack insurance. If Speaker Boehner believes that many people would lie to get an insurance subsidy then he must believe that small businesses cheat the government out of hundreds of billions of dollars a year in taxes.
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Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.
That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.
Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.
But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So it put out a study that calculated the cost of the tax to some active traders on the assumption that no one changes their behavior in response to the tax. This is of course absurd since part of the point of the tax is to reduce trading by raising the cost. The frequent flipping of assets provides no net gain to the economy, even if it can provide some individuals and corporations with large profits.
In reality, frequent traders would cut back their trading a huge amount if the cost were to rise as a result of this tax. There is considerable research on the response of trading to changes in costs or elasticity. Most find that trading is relatively elastic. In fact some research, such as this analysis published by CATO, found that the elasticity of trading for many types of assets is greater than 1. This means that the percentage reduction in the volume of trading is larger than the percentage increase in costs.
In that case when the cost of trading goes up, as a result of a financial transactions tax or for any other reason, people will on average actually spend less on trading. They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading. This is a simple story. If the cost per trade doubles, but people reduce their trading by 60 percent, then they will spend less money on trading.
The financial industry’s study completely ignored both the most basic principle in economics (demand responds to changes in price) and the extensive research on the elasticity of trading. It assumed that no one reduces their trading in response to the tax. This would be like calculating the cost of a tax on e-mails, under the assumption that the volume of e-mail messages would not change.
It is understandable that the financial industry would try to push out a study like this. After all, a financial transactions tax is money right out of their pockets. They will spend a fortune lobbying, buying politicians or doing whatever is necessary to keep such taxes from going into effect.
But the key question is why would the Wall Street Journal write up such an obvious joke as a serious study in its news section? That’s the question millions are asking.
Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.
That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.
Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.
But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So it put out a study that calculated the cost of the tax to some active traders on the assumption that no one changes their behavior in response to the tax. This is of course absurd since part of the point of the tax is to reduce trading by raising the cost. The frequent flipping of assets provides no net gain to the economy, even if it can provide some individuals and corporations with large profits.
In reality, frequent traders would cut back their trading a huge amount if the cost were to rise as a result of this tax. There is considerable research on the response of trading to changes in costs or elasticity. Most find that trading is relatively elastic. In fact some research, such as this analysis published by CATO, found that the elasticity of trading for many types of assets is greater than 1. This means that the percentage reduction in the volume of trading is larger than the percentage increase in costs.
In that case when the cost of trading goes up, as a result of a financial transactions tax or for any other reason, people will on average actually spend less on trading. They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading. This is a simple story. If the cost per trade doubles, but people reduce their trading by 60 percent, then they will spend less money on trading.
The financial industry’s study completely ignored both the most basic principle in economics (demand responds to changes in price) and the extensive research on the elasticity of trading. It assumed that no one reduces their trading in response to the tax. This would be like calculating the cost of a tax on e-mails, under the assumption that the volume of e-mail messages would not change.
It is understandable that the financial industry would try to push out a study like this. After all, a financial transactions tax is money right out of their pockets. They will spend a fortune lobbying, buying politicians or doing whatever is necessary to keep such taxes from going into effect.
But the key question is why would the Wall Street Journal write up such an obvious joke as a serious study in its news section? That’s the question millions are asking.
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