Unproductive patents

Patents are a state-granted property rights, designed to promote innovation and the transfer of knowledge. They grant the holder a time-limited, exclusive right to make, use and sell the patented work, in exchange for the public disclosure of the invention. This, so the theory goes, allows creators to utilise and commercially exploit their invention, whilst disclosing its technical details allows for the effective public dissemination of knowledge. However, complaints that the patent system is broken and fails to deliver are common.

Patent Assertion Entities (or ‘Patent Trolls’) buy up patents simply to threaten accused infringers with (often dubious) lawsuits, and are estimated to cost American consumers alone $29bn annually. Another scourge are the 'patent thickets' made up of overlapping intellectual property rights which companies must 'hack' through in order to commercialize new technology. These have been found to impede competition and create barriers to entry, particularly in technological sectors.

Even thickets and trolls aside, using the patent system can carry high transaction costs and legal risks. Litan and Singer argue that this prevents many small and medium businesses from utilizing the system, with over 95% of current US patents unlicensed and failing to be put to productive use. This represents a huge amount of potentially useful 'dead' capital, which is effectively locked up until a patent's expiry.

There are plenty of ways we can tinker with the patent system to make it more robust and less expensive. However, they all assume that patents do actually foster innovation, and are societally beneficial tool.

A number argue that even on a theoretical level this is false; the control rights a patent grant actually hamper innovation instead of promoting it. Patents create an artificial monopoly, which results, as with other monopolies, in higher prices, the misallocation of resources, and welfare loss. Economists Boldrin and Levine advocate the abolition of patents entirely on grounds the that there is no empirical evidence that they increase innovation and productivity, and in fact have negative effects on innovation and growth.

A new paper by Laboratoire d'Economie Appliquee de Grenoble, authored by Brueggemann, Crosetto, Meub and Bizer backs this claim, by offering experimental evidence that patents harm follow-on innovation.

Test subjects were given a Scrabble-like word creation task. Players could either make three-letter words from tiles they had purchased, or extend existing words one letter at the time. Those who extended a word were rewarded with the full 'value' of that word, creating a higher payoff to sequential innovation. In ‘no-IP’ (Intellectual Property) game groups, words created were available to all at no cost. In the IP game groups, players could charge others a license fee for access to their words.

The results are striking:

We find intellectual property to have an adverse effect on welfare as innovations become less frequent and less sophisticated…Introducing intellectual property results in more basic innovations and subjects fail to exploit the most valuable sequential innovation paths. Subjects act more self-reliant and non-optimally in order to avoid paying license fees. Our results suggest that granting intellectual property rights hinders innovations, especially for sectors characterized by a strong sequentiality in innovation processes.

In fact, the presence of a license fee within the game reduced total welfare by 20-30%, as a result of less sophisticated innovation. Players in these games used shorter, less valuable words, and in order to avoid paying license fees would miss innovation opportunities which were seized upon in no-IP games.

The authors suggest that patents could be harmful in all highly sequential industries. These range from bioengineering to software, where the use of patents has been strongly criticized, through to pharmaceuticals, where the use of patents is much more widely accepted. If patents really do restrict follow-on innovation even remotely near as much as suggested, the implications could be huge.

Of course, the study is only experimental and far less complex than real life, but it’s a useful contribution to the claim that patents do more to hinder than to help.

NGDP targeting: Hayek's Rule

One thing I go on about on this blog is how nominal GDP targeting—a market monetarist policy proposal that has even won over a small group of New Keynesians—is also the kind of policy an Austrian should want in the medium term. Of course, in the long term we'd like to abolish the Bank of England altogether, but even then we'd get, with free banking, something like a stable level of nominal GDP, so it's a pretty good target to work towards. The economist Nicholas Cachanosky wrote a paper in the Journal of Stock & Forex Trading about a year ago, which I missed, called "Hayek’s Rule, NGDP Targeting, and the Productivity Norm: Theory and Application" which lays a lot of the Austrian arguments for targeting the level of nominal income in a very clear and cogent fashion. I include some key extracts below:

The term productivity norm is associated with the idea that the price level should be allowed to adjust inversely to changes in productivity. If total factor productivity increases, the price level (P) should be allowed to fall, and if total factor productivity falls, the price level should be allowed to increase. A general increase in productivity affecting the economy at large changes the relative supply of goods and services with respect to money supply. Therefore, the relative price of money (1/P) should be allowed to adjust accordingly. In other words, money supply should react to changes in money demand, not to changes in production efficiency.

The productivity norm was a common stance between monetary economists before the Keynesian revolution. Selgin [14, Ch 7,8] recalls that Edgeworth, Giffen, Haberler, Hawtrey, Koopmans, Laughlin, Lindahl, Marshall, Mises, Myrdal, Newcome, Pierson, Pigou, Robertson, Tausig, Roepke and Wicksell are a few of the economists from different geographical locations and schools of thought who, at some point, viewed the productivity norm positively.

One of the attractive features of productivity norm-inspired monetary policy rules is the tendency of the results to mimic the potential outcome of a free banking system, one defined as a market in money and banking with no central bank and no regulations. Among the conclusions of the free banking literature is that monetary equilibrium yields a stable nominal income.

Throughout Cachanosky distinguishes carefully between an NGDP target and a productivity norm, though I think these are overstated; and between 'emergent' stability in NGDP and 'designed' stability, which he (like Alex Salter) thinks are importantly different (I am not convinced).

Cachanosky believes that the 2008 crisis implies that NGDP growth beforehand was too fast, and led to capital being misallocated, but I still doubt the Austrian theory of the business cycle makes any sense when you have approximately efficient capital markets.

Despite our differences, I think that Cachanosky's papers are very valuable contributions to the debate, and hopefully they can go some of the way to convincing Austrian economists that the market monetarist approach is not Keynesian.

It's the absence of markets that causes poverty

There's an excellent discussion of a recent finding in development economics over here.

If markets are missing completely, or so unreliable as to effectively be missing, then household separation fails. The extreme case is easiest to think of. If a household is completely autarkic, and can trade with no one else, then it can only consume what it produces. The two decisions are inseparable. If they want a new TV, then they’d better have a source of rare earth elements in their back yard and a passion for soldering.

The importance of knowing if household separation holds or not is that it tells us something fundamentally important about why a developing area is poor.

What's being looked at is that horrible, $1 a day, poverty that far too many of our fellow humans are stuck in. The big question being, well, are they stuck there because of the way that markets operate? Perhaps "the market" means they can't get enough fertiliser for example. Or is it that markets simply do not exist and thus they cannot reap the benefits of the division and specialisation of labour and the subsequent trade in the increased production?

The answer appears to be the absence of markets rather than any failure in them. Which leads to an interesting thought about what should be the right way to aid them.

Instead of sending money with which to buy them stuff we should be trying to work out how to create markets. And the most important part of that is in fact information. Not from us to them, but within such communities. And that ties in neatly with something that is becoming apparent from another part of the literature. It may well be that the mobile telephone is the greatest poverty reducing technology of our times. Simply because it does do exactly that, allow the spread of the information that enables markets to do their wealth creation thing. As this excellent paper makes clear.

It's not quite as simple as "make sure there's a phone network everywhere and the poor will get rich" but we're increasingly coming to the view that that's a damn good start to solving the problem.

With property rights, there are plenty more fish in the sea

We at the Adam Smith Institute need little further evidence that property rights are the best way to an efficient allocation of resources. Even so, more literature on how property rights can work in different industries and regulatory environments is always welcome. A new National Bureau of Economic Research paper looks at how the strength of property rights can affect regulators' willingness to allow the exploitation of natural resources. They focus on the most common system of regulation, which sees a limited number of firms given the right to extract to the level of a cap set by a regulator. They attribute this, at least partly, to a benign form of regulatory capture.

Commonly, it is seen as an unwelcome anticompetitive force, leading to the overexploitation of resources by monopolistic producers in industries with clearly defined property rights. However, because of the temporary, weak, and ill-defined nature of rights in the natural resources sector, the authors suggest that this analysis is not applicable. Instead, they find that

when property rights to the resource are strong, the regulator’s choice (which is the product of resource harvesters’ influence) coincides with the public interest. However, when property rights to the resource are weak, the regulator’s choice leads to overexploitation. This suggests that the resulting extraction level is closer to the socially-optimal extraction level when rights to the resource are strong.

The authors distinguish between 'weak' and 'strong' property rights using the probability that such rights will be revoked – the more likely, the weaker the rights. They propose that, when rights are strong, firms influence regulators (either formally by voting in regulatory councils, or by informal means) to choose a lower extraction rate than they would in a situation with less secure property rights, because they are less concerned about those rights being revoked in the future. In addition, regulators discount utility from future harvests less when there is less risk of rights being revoked, causing them to favour less current extraction.

The paper tests this thesis empirically against novel panel data from 178 of the largest commercial fisheries, and finds that regulators are "significantly more conservative" in their management of resources when property rights are most secure. In those cases where poorly managed fisheries switch to a 'Catch Share' system, with more secure property rights, there is a significant fall in exploitation, supporting their thesis (the fall prior to the switch is attributed to a gradual policy change in the face of overexploitation):

If in practice the Coasean idea that the assignation and enforcement of property rights – through their effects on the decisions of regulators – lead to more efficient outcomes, this has important implications for policy. It gives us an even greater incentive (as if we need it) to promote the institution of secure property rights, especially in those resource-rich low-income countries which could be subject to a swift depletion of natural resources due not only to tragedies of the commons, but also to the insecurity of extractive firms property rights.

Uber: helping drivers, helping customers

The first comprehensive analysis of Uber 'partners' (i.e. drivers) has come out, written by Dr. Jonathan Hall, head of policy research at Uber, and Prof. Alan Krueger, of Princeton, and formerly Barack Obama's top economist. The results in short: Uber provides flexible employment at higher per-hour wages than traditional taxi driving, while building up reputational capital that traditional taxi systems cannot offer. It does not undermine traditional employment more general, or enhance inequality, but we all know how cheap the fares can be, and how useful the service is (this previously led me to believe that its stratospheric valuation might be justified).

This paper provides the first comprehensive analysis of Uber’s driver-partners, based on both survey data and anonymized, aggregated administrative data. Uber has grown at an exponential rate over the last few years, and drivers who partner with Uber appear to be attracted to the platform in large part because of the flexibility it offers, the level of compensation, and the fact that earnings per hour do not vary much with hours worked, which facilitates part-time and variable hours. Uber’s driver-partners are more similar in terms of their age and education to the general workforce than to taxi drivers and chauffeurs.

Uber may serve as a bridge for many seeking other employment opportunities, and it may attract well-qualified individuals because, with Uber’s star rating system, driver-partners’ reputations are explicitly shared with potential customers. Most of Uber’s driver-partners had full- or part-time employment prior to joining Uber, and many continued in those positions after starting to drive with the Uber platform, which makes the flexibility to set their own hours all the more valuable. Uber’s driver-partners also often cited the desire to smooth fluctuations in their income as a reason for partnering with Uber.

As we see above, Uber drivers really like their jobs, and that's probably why so many of them are still there a year later. I actually feel quite sympathetic towards existing taxi drivers both in the UK and US. They were forced by existing rules to invest heavily in getting their privileged spot in the market place, and Uber is effectively circumventing this process altogether.

This suggests we should compensate taxi drivers so that in the future people are not so worried that tech changes will force transformational rule changes that will ruin them. But this progress promises improvements on practically every margin of taxi driving; I can imagine a future where no traditional taxi driving exists—indeed with self-driving cars I can imagine a future where only an Uber-style rental-taxi system exists. So, compensation aside, it must go on.

Trade restrictions and dehumanisation

Tariffs are simply taxes but one can see why subsidies are, in the eyes of some, somewhat justifiable (though they still remain morally reproachable). However, a closer examination of both reveals the problematic, degrading moral assumptions that their imposition necessarily presupposes (along with all protectionist policy). Protectionist policies are, more often than not, designed to protect domestic industry. The argument is usually phrased along the lines of “protecting our farmers’ jobs”, “our workers’ jobs”, “our manufacturing industry”. It all boils down to protecting the jobs of domestic citizens; this is essentially nationalism in benevolent garb.

‘Protecting’ farmers, for example, from the competition of comparatively cheaper foreign imports imposes costs upon domestic consumers (whose range of choice is restricted and who are forced to pay higher prices). However, protecting domestic farmers over foreign farmers via tariffs, subsidies and other trade restrictions presupposes a key value judgment by elevating domestic farmers’ jobs’ intrinsic worth over foreign farmers’ jobs’ intrinsic worth. There is no real economic reason for this since this is one topic that all economists agree on (except, perhaps, for some agricultural economists based in rural and/or semi-rural communities); that is, that there should be free trade between countries – rather, this is a question of politics.

Systemically, it is an issue of agricultural land usage rights; after all, if farmers could diversify the use of their land, then they would no longer need subsidies (since their income stream would no longer be limited solely to farming) – hence, they are also tools of perpetuating political dependence. There is also the issue of food security but this is reflective of the prevailing war-ready/war-preparing psyche and artificially reduces the costs of going to war in the first place (an obvious cause for concern in the long-run). In this case, the criteria for elevating the political worth of a person boils down to voting rights, nationality, culture, ethnicity etc. rather than the simple fact of the personhood they are naturally endowed with.

Those who lobby government to redistribute wealth argue that it is unfair that people can be so privileged or downtrodden merely through birth. However, tariffs and subsidies are essentially income redistributions in at least three ways; firstly, from taxpayers (taxes fund subsidies), secondly, from consumers (tariffs make products more expensive and reduce a range of choice) and thirdly, from foreign producers (by making it infeasible for them to export and thereby make a living). Through capitalising on the shaky, divisive social construct of nationality and citizenship, protectionists have successfully increased tax revenue and subtly assaulted the intrinsic worth of human life. Is this redistribution of income really worth moral retrogression?

Oxfam, capitalism, and poverty

After Thomas Piketty's Capital in the 21st Century told us about rising inequality, it's perhaps unsurprising that a new report from Oxfam tells us the global 1% will soon own half of all the world's wealth. But things are not quite as they seem. Oxfam's figures look at net wealth, implying that Societe Generale rogue investment banker Jerome Kerviel is the world's poorest person, and Michael Jackson was afflicted by the direst poverty before he died.

Ivy League graduates about to start a job as an investment banker at Goldman Sachs are judged far poorer than rural Indian farmers with the tiniest amount of capital.

Seven point five per cent of the poorest tenth of the world live in the USA, the figures say, almost as many as live in India.

And the claim that 85 own as much as 3.5bn is even more misleading, since the bottom 2bn don't have nothing, but negative wealth—something like $500bn of it.

What's more the global 1% probably contains more Times readers than CEOs or oil sheikhs—you need own a house worth around £530,000 to enter it.

All these facts skew Oxfam’s figures to make them astonishingly misleading.

Better figures tell a completely different and far more optimistic story.

Global poverty has actually fallen enormously with the rise of global capitalism. The fraction of the world's population living on less than $2 a day (measured in constant dollars) has crashed from 69.6 per cent in 1981 to 43 per cent today.

Even if you take out India and China, where the most spectacular improvements have been made, and look only at Sub-Saharan Africa, the worst-off region, there have been improvements. From 1981-2006 8.6 percentage points fewer were living on under $1 a day and 4.9 percentage points fewer were living on under $2 a day.

In virtually every respect global poverty is falling and poor people are living longer, better lives. That is less sexy than Oxfam’s claims, but at least it is true.

Never mind the quality of the Green New Deal just feel the width

The Green New Deal has another of their little reports out. Essentially saying the same as all of the previous ones. Print more money to spend on all that Caroline Lucas holds dear. But it really does have to be said that the level of economic knowledge that goes into these reports is not all that high. We've for some years now had the egregious Richard Murphy shouting that we should just collect all hte tax avoided and evaded in order to beat austerity. He not realising that collecting more tax is austerity. For it reduces the fiscal stimulus as it reduces the budget deficit. And of course, there's a similar gross error in this latest report:

No Need to Repay QE Since QE involves a central bank putting new money into circulation by creating e-­‐money and using it to buy assets, this will not increase Europe’s debt levels according to the originator of the term ‘quantitative easing’, Professor Werner, Director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton. He states that since the central bank can simply keep the assets on its balance sheet then there is no need for taxpayers to pay or to expand public debt. The assets should simply stay on the central bank balance sheet. Furthermore, this debt, which would be owed by the government to the central bank would not have to be repaid, as Adair Turner, the former Chairman of the UK Financial Services Authority has made clear. In the European context, the EIB is the European Union's bank, owned by and representing the interests of the EU Member States and so the debt that the EIB would incur through Green Infrastructure QE would also not have to be repaid.

Well, according to that first paragraph I've no need to repay my mortgage as I used the loan to buy an asset. But leaving that aside note the deep appreciation of matters economic on display here.

QE is the central bank creating money to purchase assets. Therefore the EIB can and should do this. But the EIB is not a central bank with money creating powers. It's an EU development bank that borrows on the usual capital markets for funding. The EIB simply cannot do QE because it's not a central bank.

We might not expect any more insight than this from a combination of Caroline Lucas, Richard Murphy and Colin Hines. But Larry Elliott has always been rather more sound than this: is he still with this group or has he left in disgust?

The amusement of Oxfam's wealth report

Oxfam is one of those groups jetting off to Davos this week to talk about how to set the world to rights. And they're doing so by going to sit among the plutocrats and telling everyone that it's the very plutocrats that are the problem. The top 80 people have more wealth than the bottom 50%, this is appalling and so on. You can see the report here.

Wealth: Having it all and wanting more, a research paper published today by Oxfam, shows that the richest 1 per cent have seen their share of global wealth increase from 44 per cent in 2009 to 48 per cent in 2014 and at this rate will be more than 50 per cent in 2016. Members of this global elite had an average wealth of $2.7m per adult in 2014.

Of the remaining 52 per cent of global wealth, almost all (46 per cent) is owned by the rest of the richest fifth of the world's population. The other 80 per cent share just 5.5 per cent and had an average wealth of $3,851 per adult - that's 1/700th of the average wealth of the 1 per cent.

Winnie Byanyima, Executive Director of Oxfam International, said: "Do we really want to live in a world where the one per cent own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.

Winnie needs to get out more. As Saez, Zucman and Piketty have been explaining to us all this is just how wealth distributions work. The bottom 50% always have less than 10%.

Fraser Nelson is very good here. This global capitalism stuff has been reducing poverty like billyo these past few decades. And for a charity like Oxfam, nominally focused upon poverty, we might think that's a good thing. But they seem to have changed their minds a bit.

But for one elegant point about this brouhaha have a look at Figure 1 on page 2 of that very Oxfam report. Their actual complaint is that global wealth inequality is climbing back to, but is still under, the level reached in 2000 and 2001. This isn't unprecedented, it's not staggering and it's not even unusual. Wealth inequality is actually lower than it was 15 years ago.

We might have an answer to where (some) of that missing growth is

It's a commonplace these days to shout about how growth rates are lower than when we had strong unions, nationalised companies and stinging tax rates. Therefore we should bring back unions, stinging tax rates and nationalised companies in order to have higher growth rates. The perceptive will note that there's a fallacy of composition in that argument: I once met a very pretty girl on a day that I had a cold. My getting a cold today will not make me meet a very pretty girl (nor would it please the pretty girl I am still with if I did). However, leave that aside and we do still have this point that growth rates these days are lower than that post-WWII heyday. One explanation is that there was pretty much no economic growth 1933-1945 but technology still marched on and thus there was some catch up after the unpleasantness was over. In conversation over the past couple of days another idea has popped up.

Take the contributions of Google and Facebook to the economy, to GDP. As we measure them those contributions are simply the value of the advertising they sell (or, the wages they pay and profits they make). That's just how we calculate GDP. That portion of whatever it is that is monetised. But this is near insane, to value having the world's knowledge at our fingertips (or, in Facebook's case, all the people you never want to meet again at hand) at only the value of the ads presented with it. we're simply not measuring the true contribution of the new technologies to our actual standard of living. At which point, Brad Delong:

 The key difference is between “Smithian” commodities–where it is a safe rule of thumb that the consumer surplus generated is about equal to the producer cost, so that GDP accounts that value goods and services at real producer cost will capture a more-or-less stable fraction equal to half of true standards of living–and… I might as well call them “Andreessenian” commodities, where consumer surplus is a much larger proportion of monetized value because what is monetized is merely an ancillary good or service to what actually promotes societal welfare. What is the proportion? 5-1? 10-1? Somewhere in that range, I think–at least.

It would be safe to argue that there's definitely some of this going on. The difficulty is quite how much. But it wouldn't surprise at all to find that our traditional measure of GDP is increasingly failing to measure economic progress.