Russ Roberts

Tabarrok on Innovation

EconTalk Episode with Alex Tabarrok
Hosted by Russ Roberts
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Alex Tabarrok of George Mason University talks with EconTalk host Russ Roberts about his new book, Launching the Innovation Renaissance. Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies. He then suggests how these might be improved to create a better climate for innovation that would lead to higher productivity and a higher standard of living.

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0:36Intro. [Recording date: December 14, 2011.] Ebook available at Kindle. TED talk related to book. Want to start with the problem the book is proposing to fix or improve, our innovation situation in the United States. I think most people still see the United States as a very innovative place. Maybe not in 2011 because our economy is not doing very well, but it's still considered a place and source of innovation. So: Why is there a concern about the current levels of innovation and entrepreneurship in the United States? Well, innovation is one of those things that more is better. So I think we'd certainly like more. I do take for granted in the book what my colleague Tyler Cowen has called the Great Stagnation. Whether you call it a great or modest stagnation, it is true that since about 1973, the rate of productivity growth in the United States has been below its trend--its trend from about 1947 to about 1973. And we've been falling below that. And as you know, productivity is the single most important factor in creating a high standard of living. When we can do more with less, that is better than anything else. And so when our productivity levels are less than what they might be, that's going to be a subject for concern. I certainly agree with that, with part of that, that more is better. I wish we had a better economy. I think--my problem problem with Tyler's analysis and to some extent yours, although you don't rely on many things that Tyler relies on--if you just look at the raw productivity numbers from 1947-1973, it's not like it slowed down in 1973. It's that it suddenly changed its slope dramatically. So, there's a puzzle there that I suspect has something to do--possibly with slower productivity, although that's a little hard to understand given that the last 20-30 years have been extremely innovative, at least given our everyday lives. We look around, we see lots of innovation. We also see a big change in our economy over those 60 years we are talking about. We've had a steady decline in manufacturing as a source of employment and steady but still very productive manufacturing sector because of the innovation that's taken place. So, I'm a little puzzled by those numbers. I don't think--it's one thing to say it's slowed down; but if you see an abrupt change like that, you have to look for things around 1973. I see things being pretty innovative post-1973 relative to pre-1973. If it's not in the data, maybe the data are not measuring some of the gains that are out there. And of course as we've moved to an increasingly service-sector-oriented economy; those innovation gains are going to get smaller. It's part of the problem. That's possible. I think it is very difficult to get an intuitive sense of how much innovation is a lot and what we might expect. I do like this intuitive idea of thinking, if we go back 60 years, 1950, we think about 1950; and it's basically a modern world. It's less advanced than our world, but you have television, radio, airplanes; you even have a few large computers. Cars. Now, you go back another 60 years, to 1900 or something like that, 1890--totally different world. There's no airplane, no radio, no television, and the world from 1890-1950, that looks like an impossible change. That looks like science fiction. That doesn't look like extending out 1890. So, I do think that there's also an intuitive argument for the idea that the rate of innovation has not been as high as it was in previous years. If you go back over that time period. But my focus, however, is: We can do better than we are doing now. So, let's look at the problems that we have now and where we can do better.
5:23And certainly, if there are barriers to innovation, which you identify in the book, then we should get rid of them if we can. So, let's talk about those. You identify a whole bunch of different problems, and opportunities that aren't being taken advantage of. The first one you mention is the U.S. patent system. Which is a little ironic, because it was put into place to preserve incentives for innovation. So, make the case for and against patents. What's the argument? The argument for patents is that imitation is a lot cheaper than innovation. So that, if a firm innovates, creates something new, and another firm can come along, imitate that product, eat away all the profit, and the first firm can't recover its research and development costs. And then they wouldn't have any incentive to do them and you won't get much innovation in the first place. Exactly right. Now, there's lots of arguments against. One of the first arguments against is just to ask: Are patents necessary? Because often it takes a long time to imitate a product. It's not always easy. I have a number of examples. I look at roses, for example. Roses have been around for thousands of years. The Chinese emperor had hundreds of books in his library about how to propagate roses. No one has ever claimed that we don't have enough new roses. And yet, for the first time ever, in 1930, we created in the Plant Patent Act, we could patent roses. So, did patenting of roses lead to more roses, more beautiful roses? Because people could capture the benefits without fear of being copied? Exactly. Did it lead to a flowering? No, it did not. We didn't see any big increase in rose innovation. In fact, we might have seen a little bit of a decrease. Moreover, even today, most new roses are not patented. Most inventions, most innovations are not patented. And I think people are a little bit surprised about this. With a few exceptions--chemicals, pharmaceuticals--being really the two biggest important exceptions. In some fields we don't even all patents, like fashion. Highly innovative, no patents at all. But in most fields, most innovations are not patented at all. You mention an example I've been thinking about recently, which is sports. Somebody innovates a new formation in football. It can't be patented. But coaches spend hours looking for a small edge. It's true that once you see it you can copy it, but usually the person who creates it, for a variety of reasons might be able to implement it better than the copier, either because they understand it better, either because it's theirs; they have more passion for it. And that's also true in many cases for ideas. People come up with ways to make it harder to copy without using patents and the monopoly power that come with them. Certainly there's a lot of innovation in the fashion world without patents. We had a podcast on that. But there are exceptions, as you point out. So, you would not get rid of patents on pharmaceuticals. Why? So, pharmaceuticals are really the classic case of where the innovation-to-imitation costs are extraordinarily high. It costs about a billion dollars to create a new pharmaceutical. The first pill costs a billion dollars; the second pill costs 50 cents. So, that's a classic case where imitation costs really are low. That's the best case for patents, in a field like that. But my question is: Why does every innovation deserve or require the same 20-year patent? Why do we have a system which gives a one billion dollar pharmaceutical--where there's $1 billion in research and development costs--we give that a 20-year patent and one-click shopping gets the same 20-year patent? That makes no sense whatsoever. So, what I suggest is a more flexible system. I'd like to have a 20-year patent, maybe a 15-year patent, maybe a 3-year patent. Something like that. And then we could say: You want to apply for a 3-year patent? We are going to get this through the system quickly; we won't look at it so much. Hurdle to make the case for it smaller. Exactly. You want a 20-year patent, though: You'd better show us that you really are deserving and put some costs in there. Now, a side-note on the pharmaceuticals--I'm surprised you didn't mention this. Maybe you are just trying to be strategic. It's true it costs a billion dollars to develop a new drug; but there's a reason it costs a billion dollars. A lot of that cost is to no avail. It's replicating tests that sometimes already happened in Europe. A lot of it is the regulatory structure around the drug industry. People who are worried about drug pricing--one of the ways to solve the drug pricing problem is to remove the patent or shorten the patent. I'd like to shorten, reduce the research and development costs and the approval costs. Are you with me there? Absolutely. So, we have drug lag and even more importantly, we have drug loss. There are lots of drugs today which probably could be invented, but people know going in the costs are just too high. So, sure, I would like to see those costs come down. As a theoretical point, however, I still think that the pharmaceutical industry is the best case for a patent in that the innovation/imitation costs are very high. But there are other things we can do to bring those costs down.
11:24So, let's talk about the expansion of patentability that's happened in the last 15 years or so, where the courts have allowed ideas to be patented, business concepts. A lot of people you hear have come forth and said this is crazy. And a point you emphasize, which I think is very compelling, which is that when you patent ideas, that makes it hard for people to use those ideas to create new innovations. So, one of the disincentive effects of patenting is that it discourages ideas being used in creative and new ways. Everything is, as you point out, we are always standing on the shoulders of giants--the Isaac Newton quote. Newton didn't have to pay for it, but the rest of us are. You might say: so, that's not a big deal; so, you pay for it. But the problem is that paying for it isn't so simple. Right. So, let me come back to that point in a minute. Before we quite get there, I want to give you another example which I think is important. I want your audience to think about the most innovative U.S. company, the most important innovative U.S. company they can think of. Maybe you are thinking about Apple. Some people would. That's definitely an innovative company. I'm thinking about the Patriots, Bill Belichick, because I like the sports thing. Or maybe a fashion--I don't have any fashion expertise, as listeners know. Go ahead. I'm going to say: Walmart. Now, you think about Wal-mart, the world's largest corporation, half a trillion in sales every year. Estimated to have saved consumers a quarter of a trillion dollars annually. This is an incredibly important U.S. corporation. And if you think about the booming 1990s, where were the big productivity gains in that decade? In retail. Boring, hundred-year-old retail industry. And yet that is where we saw really big productivity improvements. A huge chunk of that coming from Walmart. And how did they do this? Was it coming from some new high-tech invention? No. They did it by better training of the sales staff, better training of cashiers. Through some Radio Frequency Identification (RFID) chips and things like that. Application of technology. Innovation there that clearly was not patented. Exactly. In fact, Wal-Mart, world's largest corporation, has about 60 patents to its name--a trivial amount--including one for a shoe box. So, here we see an incredibly important U.S. company not using patents at all, and I think that's important to really remember. It's a great point. The only caveat I would add is that 60 is a small number compared to, I think you give Microsoft's, which is in the thousands; but it could be that one of those 60 is the key patent that allowed them to use some sort of information technology (IT). But I think that's not true. My guess is, as you point out: They figured out some ways to apply technology and training and other things. Everybody copied them. Target copied them; K-Mart copied them; others copied them who have disappeared--because they couldn't do it as well. For a whole bunch of reasons that you and I have no idea what they are. Assume it had to do with how it was implemented, who implemented it, synergies they had with other stuff they were doing. But clearly they were able to be innovative without it. But in the area of high tech--where are we going to go after this? Cumulative innovation and ideas. So, when we talk about these drawbacks to the current system and how lenient it is and allowing things to be patented that make it harder to innovate--but I look at the pace of innovation. It looks pretty good. I look at the gadgets and the Internet--yes, it's kind of crazy that one-click is patentable, kind of crazy that people can patent ideas, business concepts. It's almost as silly as saying a podcast should be patentable. Whoever gave the first podcast--that was a great invention, a radio thing on the web. But obviously that's foolish and discourages innovation and things that make the world a better place. But what's the evidence that this is causing a big problem? It does appear to be making a lot of employment for lawyers, who have to deal with all these systems and make sure they have taken care of all the intellectual property. Is there something to be worried about? I think the problem is that you may be looking for the evidence where the lamp is. You are looking for evidence of how innovation has been reduced in highly innovative fields. But these highly innovative fields--the Internet and smart phones and so forth--they've been innovative not because of these patents but despite them. And I think the situation is becoming worse in these fields. So, what we are seeing right not is firms like Google and Microsoft buying up these patent arsenals. And they are not doing it because they need access to those technologies. They are doing it because another firm can't sue them and prevent them from innovating. Well, what's bad about that? What's bad about that--I call this the Mutually Assured Destruction--and mutually assured destruction I think was not the greatest way to maintain peace. Probably not the greatest way to maintain innovation either. And I think what the real problem of this idea of innovation through strength--we will be able to innovation because we have this patent arsenal behind us--is that small firms don't have that. So, we are seeing a kind of Intellectual Property (IP) feudalism. We are seeing these very big companies get ahold of these arsenals so nobody can attack them. But that means the small firms can't attack them either. Small firms are being crushed. And what do we know about really disruptive creative disruption? That often comes from the small firms. So, I am worried that we are going to see--yes, you can get innovation if it's from big Google, but what about the little google, the google of 20 years ago, the next google? Which doesn't exist because it can't have the legal department, at its small size, that its competitors have. So, the innovation we are not seeing, that's the invisible innovation. We are not seeing it; we can't look for where it is.
18:04So, some of my best friends are lawyers and it turns out a lot of my best friends are intellectual property lawyers. It turns out I can think of at least three, maybe four friends of mine who are in this world. They are the nicest people. I really mean they are good friends, not just people I happen to know who are IP lawyers. They of course, not surprisingly, think that intellectual property and the expansion of property rights into this area is very natural and crucial, and wonderful. They may be a little too close to the problem. And there are a lot of them. Are they an important special interest? Obviously Google, and large corporations generally, are going to want to discourage small firms from innovating. Are the legal experts who spend all their hours worrying about whether this intellectual property is accessible or not and at what price and negotiating it--they have a strong stake at keeping the world as it is. Are they discouraging the kind of innovations in this area that we might want to be seeing? In a way, though I wouldn't phrase it like that. They are nice people. Absolutely. Of course an IP lawyer very naturally wants to think of themselves as promoting innovation and when you take a partial equilibrium point of view, that's probably what they are doing. But I think you have to see it in the larger picture. And I would frame it like this: I think an incorrect framing and one which we see a lot, is that it's sort of consumers versus the producers of intellectual property. And the consumers want less intellectual property and the producers want more. I think that's a bad way of looking at it. Because when we come to these fields where there's a lot of cumulative innovation, 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. And 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 for innovation. So, think about a product--if we have a product which requires four other patents to move ahead, build on four other patents--each one of those owners is going to say they want 30% of the profits. Then that's going to be a hard exchange to make. But when we have a hundred previous patents, each of them wants 10% of the profits, it's almost an impossible deal to make. Coasian bargaining is really hard when you've got lots and lots of these people. Just the pure transactions costs of tracking down the hundred and contacting them and opening the negotiating process. Exactly right. And so I think that when we look at the big picture, that's where innovation is going to be slowed down. And it's also where what we need to tell the innovators is not that this is a way of restricting your rights; it's a way of making innovation easier. It's a way of lowering the cost of innovation. It's a way so that you don't need the permission of everyone else to innovation. We want people to stand on the shoulders of giants. As I say in the book, Newton might not have seen so far had he been required to pay for the privilege. So, what we want to tell innovators is: Yes, go ahead and be the Newton, stand on the shoulders of giants, and you don't have to pay for that. We are all going to be able to see farther. It's an inspiring vision. One way to practically implement that is to change, as you suggest earlier, the timing, so not only do we get 20 years. Any other ideas? Would you stop some things from being patented at all? The remarkable thing is that the extension of patents to software and semi-conductors and business methods and the broadening of the interpretation of these patents has been almost all judge-driven. This is actually not legislation so much. It's judges. Judges have decided to interpret these patents in these broad ways. And they don't have to do that. The law hasn't actually changed that much. I talk a little in the book about Thomas Edison and the light bulb, and there actually was a previous patent. Sawyer and Mann had patented to make the incandescent filament. Any fibrous or textile material. And Edison came along, and he tried 5000 different materials before he hit on the one--it happened to be bamboo, and not just any bamboo but bamboo that he had dispatched a man to Japan to find the right bamboo. So he had gone through all of these different types of materials and yet Sawyer and Mann sued him and said: We have a patent on any fibrous material. And the court looked at that and they said, this is crazy. You can't give such a broad patent. Sawyer and Mann didn't actually investigate all 5000 of these. And if we were to give such a broad patent, this would actually discourage innovation. So, they said no to the Sawyer-Mann patent and let Edison go ahead. We could do more of that today. The trouble today is we have not done what the judges did in the Sawyer and Mann case. We've said: You can get a patent on any fibrous material, analogously in many other fields. We've given these broad patents. And that actually discourages people from doing the real work of implementing, of creating a product. Now you can just patent an idea. It's like a science fiction author can patent ideas; long before they are every even possible to be implemented you can patent the idea. Even before it's technologically possible. And that has actually discouraged innovation.
24:28Let's move on to education, which is the next broad theme of your book. You argue that the American education system, both K-12 and at the college levels, has got some serious problems. Let's talk about it. What's wrong with it? And of course, as a result, education is a key part of innovation and productivity. If you don't have a well-educated populace you are not going to have a very good economy. What's wrong with our education system? Let's talk about K-12. Here's two remarkable facts, which have just blown me away. Right now, in the United States, people 55-64 years old, they are more likely to have had a high school education than 25-34 year olds. Just a little bit, but they are more likely. So, you look everywhere in the world and what do you see? You see younger people having more education than older people. Not true in the United States. That is a shocking claim. Incredible. And the reason is that the drop-out rate has increased? Exactly. So, the high school dropout rate has increased. Now, 25% of males in the United States drop out of high school. And that's increased since the 1960s, even as the prospects for a high school dropout have gotten much worse. We've seen an increase, 21st century--25% of males not graduating high school. That's mind-boggling. Why? One of the underlying facts relating to education, which is [?], which is that the more education you get on average--and I'm going to talk about why on average can be very misleading--high school graduates do better than high school dropouts; people with some college do better than high school graduates; people graduating from college do better than people with some college; people with graduate degrees do better than college grads. And the differences are large. Particularly if you compare a college graduate to a high school dropout, there is an enormous difference. So, normally we would say: Well, this problem kind of solves itself. There's a natural incentive to stay in school, and I wouldn't worry about it. Why should we be worrying about it? It doesn't seem to be working. Why isn't it working and what could be done? I think there's a few problems. One is the quality of teachers I think has actually gone down. So I think that's a problem. This is a case of every silver lining has a cloud, or something like that, in that in 1970s about half of college-educated women became teachers. This is at a time when there's maybe 4% are getting an MBA, less than 10% are going to medical school, going to law school. These smart women, they are becoming teachers. Well, as we've opened up, by 1980 you've got 30% or so of the incoming class of MBAs, doctors, lawyers, are women. Which is great. Their comparative advantage, moving into these fields, productivity, and so forth. And yet that is meant that on average, the quality of teachers, the quality pool we are drawing from, has gone down in terms of their SAT levels and so forth. So, I think we need to fix that. Some conservatives are saying it's all the unions and we need to crush the unions. There's something to that. Maybe not crush them. Have them stand aside so that innovation can take place. You are much more politic than I. My point of view is that actually what we need to do is we need to pay teachers more. Now, we need to come up with a bargain, where if we are going to pay more, we need to test, we need to qualify, we need to make sure we are getting quality. We need higher standards. We do pay them more. We pay them a lot more than we did in 1960. But we did it in a way that didn't guarantee that we got better teachers. And you could argue we just didn't pay them enough more to compete with the alternatives. But I think it's worse than that. So, if we doubled all teacher salaries tomorrow, they wouldn't become better teachers. The challenge is: How do you encourage good teachers to be attracted to those higher wages and bad teachers to be rejected because they are not good enough? Right. We paid them more, though we paid them less compared to those other fields that I was talking about that women now have an opportunity to go into. So, it used to be a teacher and a lawyer, starting off on Day 1, having about the same salary. Today, on Day 1, the lawyer's got three times the salary. So, in terms of the opportunities, which are available to smart people, we make teaching a much less desirable place for smart people to be. I'm not sure how important that is. It's an interesting point. We've had a lot of podcasts on education. It just strikes me, if you think about K-12, a lot of K-somewhere--I'm not sure where that second number is--doesn't require the skills of a great MBA, legal, medical mind, a set of subtle, intangible skills that I am not sure are related to what it takes to be a great teacher. Maybe high school math, you need bright people; and we don't do a very good job of attracting math teachers. I think that's a problem. It's not obvious to me that the gray lining to that silver phenomenon of women going into more good-paying fields is a problem with our educational system, with the way we teach our kids. Well, I think it's one problem. I'm going to have to disagree with you a little bit on this point: I have two kids, and it's hard enough for me to manage 2 kids. The idea of managing 20 or 30 in a classroom, keeping them all interested and going forward and dealing with each one of their problems--I that's a really tough job. Oh, I think it's a very tough job! I just don't think IQ or the skills that make someone a successful doctor are necessarily means--I don't think we need to take the [?] medicine and keep them in the classroom. Right but those skills, they do have alternative uses. No doubt. And if those alternative uses are being paid highly, then in order to get those skills, we need to draw from them. Agreed. So one part of it is paying teachers more, but requiring more of these teachers as well. And the other part of it is that we have sort of pushed one yellow-brick road to education in our society. We have said: The only type of education that matters is the sit-down, sit-on-your-hands, sit quietly, pay attention, listen to the teacher, absorb what they are saying, go to college, do this for 12 to 14 to 16 years; and that is the type of success which we count. It's the only type of success which we count. And the goal of high school is to aspire to do that for another 4 years somewhere else. Harder classes, perhaps, but it's the same model. We need to listen to the dropouts, because the dropouts are telling us something important. Because, first, they are dropping out of high school; then a lot of the ones who make it to college even end up dropping out of college. So, this type of learning, hard for a college professor to understand, but some people think college is boring. Strangely enough! Or high school algebra. That's right. What we need to do is to think about other types of education. People think that the only type of education is schooling. And particularly college schooling. But there are other types of education. In Europe, here I think they've done a better job of creating more roads to a high school work force. So, in Germany and Finland and Switzerland, many of these other European countries, 40-70% of the kids in those countries opt for a high school program which involves some sort of apprenticeship, which involves some training. So, it's workplace learning, which combines theory with practice. The students get paid. They are acculturated into the adult world. We don't block off all these teenagers; we introduce them into the adult world. And we provide them with skills. And in the United States we think about these programs, vocational training, as like shop class. Being a mechanic. Right. But there's a lot more to it than that. Being an optician; there's a new field called megatronics--the old term for it is steam fittings, pipe fittings. But when you actually look at it it's massive operations control of how a modern factory actually works. So, these are high skill jobs; require a lot of intelligence, a lot of creativity. But we don't reward them.
34:03And to lead us into the college discussion: Of course, when we have aspects of our college education system that are useful for those activities, we have to gussy them up with intellectual bells and whistles and window dressing to make it feel like it's scholarly. There is obviously a lot of practical things you have to understand to run a factory, a warehouse. We teach some of those things in business schools. But business schools that just do that, would feel: That's just a trade. And so they'd feel they have to have this intellectual pretension if we are going to have them in the university. And the same thing is true with legal education. Every lawyer I've ever met says: I didn't learn anything about being a lawyer in law school. What you learn: the theory of law. It's like interesting. You pay, you have more years of student debt to pay for something that isn't very useful. It's interesting; maybe some people would like to pay more. But that's the only road. We don't have a lot of vocational training in business and legal professions and elsewhere in other activities in the universities. Outside the universities--I see the ads; I assume they are training people. But a lot of what we do in college is not exactly what people would find most useful. It's interesting. Exactly. We've divorced the world of work from college, and we've made college--I mean, it's a great experience. I look at my own university, our university, and we have two Olympic-sized swimming pools; we've got great athletic facilities; we've got restaurants and things on campus, and things like this. But it's totally divorced from the work world. Well let's turn to college now. You have some interesting observations on what's happened in college campuses educationally, particularly with respect to what people study. I find it very funny, because there's an enormous literature in economics where people look at the relationship between education and labor force outcomes--wages, compensation, salary. And the education variable that enters into the equation is inevitably years of schooling. It's like lifting weights. I lift 50 pounds, 100 pounds--so, 12 years of schooling is more than 10, which is more than 8. But of course in the data set are all these people who are studying radically different things, some of which guarantee you a very high-paying job from the beginning, followed by great appreciation; and others who have no employability whatsoever. It's a very strange model. So, talk about what's going on on the college campuses with respect to what people are studying. It's shocking, some of the numbers in your book. Yes, I was amazed when I looked into this data. So, we think about innovation and high tech, and computer science. Computers are exploding, the Internet is exploding. And yet we graduated more students in computer science 25 years ago than we do today. By a small amount. But it doesn't matter. The population is obviously radically larger today as a proportion. And the economy is bigger. And there are more computers. Exactly. And the same thing is true in mathematics and statistics, in chemical engineering; you look at all of the so-called stem fields, science and technology, engineering, mathematics, and we've stagnated. We are absolutely flat. What has grown? One of the things, just to give an example, is the visual and performing arts. We graduated more students in visual and performing arts than in computer science, chemical engineering, and microbiology combined. And we've doubled the number of students graduating in visual and performing arts over the past 25 years, at the same time as the stem fields have been absolutely flat. The vocations are way up. Part of that is because there are a lot more jobs than there used to be in some of those fields. Explosion of the media world in the United States has allowed people to maintain and study things that wouldn't have been very productive in the past. Absolutely. So, I think some of these things are good. I think some of the time we have sold students a bill of goods. So, we have doubled the number of students graduating in psychology, and yet in psychology there aren't as many jobs in the entire country in psychology as we graduate every year. Obviously what's going on there is people are interested in psychology; they want to learn about themselves; they see the college experience as an exploration of self and identity; people are between the ages of 18 and 21, that's a very attractive experience, and psychology seems like a good way to do that. It's not the hardest field. The grading is relatively easy, relative to those other fields we've been talking about. So, a lot of people study it. They don't expect to get a job as a psychologist. You might ask them: What are you expecting to get a job in? That's a good question. But that's what they are doing. College, compared to, say, 1950, where college was where people went to go out and find a job, college today is an extended form, for some people, of adolescence, an opportunity to find one's way in the world. It's a very expensive way to do it. But that's clearly part of what's going on. Yes, I think that's right. So, going back to all those athletic facilities and so forth--this is consumption good. There's no problem with a consumption good so long as you understand what you are buying. But also, it's the taxpayers who are subsidizing most of this education. On the grounds--by the way--there's economists who invoke this externality. How much of an externality if you go study--well, you pick it, basket-weaving? That's absolutely right. There's very little evidence for a positive externality from higher education. Very little evidence overall. If there is an argument to be made, I think the best argument is for the Science, Technology, Engineering, and Mathematics (STEM) fields. So, if we are going to subsidize college education, I would have us subsidize the fields where there are most likely to be these positive externalities. Can you imagine if we told students entering George Mason University and the other 50-plus great universities--we are being a little tough on the schools, but let's face this possibility--but if we tell people when they come in: You want to study psychology, that's $25,000. If you want to study engineering, that's $5000. That's going to be a tough sell to the body politic. Well, you are probably right. I guess maybe we do need some marketing managers to tell us about how best to sell this idea. Maybe we should sell it as a discount: If you are willing to study science, technology, and help your country, then you get a discount on your education. Actually, I think the externalities are small in general. I think the number of people who transform the world and add not just to American well-being but people around the world through their innovations is a very small number. The average graduate in the STEM fields is not doing that. So, I'd say the argument for subsidy, to start with, is small. And we ought to be using prizes and other activities--you mention prizes early in the book--but other ways to incentivize the most gifted people in our society to go into those STEM fields and transform them. Of course, we do know that the creative people instead of taking psychology do what Steve Jobs did and go to India for a few months. And that's not a bad thing to do, either. And of course, we talked about dropouts; there are a lot of great, wonderful contributors to the world who don't go to college and do all kinds of things, some of which are in the headlines, but a lot of which are just being a successful person in life. Being a good parent. There's not a lot--I don't think we should oversell the importance of a high salary or a high standard of living for a country; there's a lot of things going on all over the world that are not measured that are just as important.
42:56So, going back to the college though and talking about these STEM fields, one of the observations you are making, which I think is very important is the fact that college is not a solution in and of itself to people who worry about American competitiveness. And I think for special interest reasons, meaning people like us who are professors, and the middle class, who overwhelmingly benefit, not the poor, from the subsidies to college, there is always this groundswell of interest that the way we need to get out of our stagnation is: More people need to go to college. Well, what you and I are saying, what you are saying and I agree with you, is maybe too many people are going to college already. Or, if they are going, they ought to study something else. I think we need more education, but education is different than schooling. And that's the thing which I think most people are failing to see right now. So, other than hectoring people, and differential pricing schemes, what else might be done to make some of these deals more attractive? Do we need to do anything? They already pay more. One of the problems in the university itself is grade inflation, because grade inflation has hit the arts and the social sciences much more than it has hit mathematics and engineering and so forth. A lot of which are the gateway to medical school where they are going to weed out lots of people and they are going to use grades to do it. Exactly. So, if you want to be a lawyer, for whatever reason it is true that the best thing to do is to get straight As while you are in college, and if you have to do it by taking Intro to History, or Psychology or something like that, rather than Calculus 101, then that's the way to do it. Because in those history classes and so forth, you are much more likely to get that A. One thing we could do: If we could create a more even playing field in terms of grades. And there are ways of doing that. We could look, for example, statistically, and say: If this student got an A while they were in the history class and they got a C while they were in the math class, while this student got an A in the math class and a B in the history class, we can even those out and create an overall grade. But doesn't the market do that already? Do we really need to worry about that? Don't people understand that the grading is easier in psychology or history--I don't know if it is in history, but I've seen actual data on psychology and some of the other social sciences. Everybody knows that. It's not a secret. Why do we have to re-weight in some formal way? What's the big deal? I think it's surprising; I do think there's a puzzle here. I don't actually have the solution to this puzzle. But it is true that employers don't appear to pay as much attention as you and I would to what fields the students graduate with--with some exceptions of course. Either they find it too difficult to do, or they just look at where the person went to college. I do think there is a puzzle there, and I don't know what the answer is. Our colleague, Bryan Caplan, on our sister site EconLog often writes that there's very little value-added at all to education: it's all signaling; I don't care what you majored in so long as you got through, you showed the persistence; the only thing I'm paying for is either you got into the school, which is a filter for quality, and then you got out, because that meant you could do that weird thing called sit at the desk and write papers and take the tests, and that's got some value. Persistence and discipline. I'm not that cynical, but there is part of that there. I think the other part comes back to what you talked about earlier, which is the quality of high school education. If high school math is badly taught, high school science badly taught, you are going to not get those people when they leave high school excited about studying those fields in a more rigorous and intense way when they leave college; and I think that's part of the problem. Yes, that's a good point. If we could start at the bottom and improve people's education all the way along. A point I want to make about education, by the way, is: There's probably no other area where we can have as much as an opportunity to increase innovation and growth than in education. Think about it this way: Almost all U.S. workers will go through the U.S. education system. Not all, but almost all. So, think about if we improved our education system tomorrow. Well, at first we are only going to get a small gain because only the new workers will come in under the new system. But as we get more and more workers coming in under the improved system, that means that we have 100 million people educated a little bit better. We are talking about trillions of dollars of potential gains there. So there's no other place, bottleneck, where we can have as much influence on the U.S. economy or society as the U.S. education system, because it's where all of our workers are going to be channeled at some point, through that system. So a small change there means a big change over the next 40 years. That sounds good; I'm not sure that's true. A lot of what we learn in life, we don't learn in a classroom, and so I'm not sure how--I think there are many ways in which they will become more productive and skilled, and we figure those ways out. And we sometimes do that in spite of our education. And sometimes our education is what allows us to do it. I think it's fascinating--you think about your education and mine--we logged a lot of hours in the economics classroom as undergrads and graduate students. And we learned a lot there. We learned a huge amount. But I'm amazed at how much I've learned since then. You could argue that's what helped me learn how to learn. Certainly there was a basic framework there. But we're in a really narrow technical field. Somebody who goes through the standard K-12 educational system and then goes on to study, it doesn't matter what it is, in college--I just have a feeling a lot of what they learn comes afterwards anyway. Maybe we ought to be shortening the whole process and getting people out into the world at an earlier age. If they were mature enough. Maybe. I think there's some truth to that for college for sure. For K-12, I think it's going to be more important. I would say you are right--people like you and I who have alternative sources of education, our parents, family, friends, peer group. All of these things are working in our advantage. But for a lot of kids in high school, they don't have those other factors working in their advantage. So the one we can really move, the one lever we have, we need to do everything we can to shift that lever. I totally agree.
50:20Let's talk about government, writ large. You have a provocative idea in the book, that we need to get away from what you call the warfare-welfare state and toward a more innovative perspective in government's role. Talk about the warfare-welfare state and what you think we ought to be replacing it with. The warfare-welfare state is really what we have in the United States. If we look at where we are spending our money, a huge fraction is in warfare and in welfare. By welfare you mean transfer payments, not just aid to the family or something like that. You look at the big four: defense, social security, Medicare, Medicaid--these are 60-70% of the budget. And this is all about transfer payments, it's all about dividing the pie. It's not about growing the pie bigger so much. It's all warfare and welfare. We don't even think about innovation; that's often not even part of the agenda. The example I give is thinking about medical care, Obamacare. We had a huge debate over this. It was vociferous, people back and forth. Now, what do we know about medical care? Well, we know two things: one, that a huge amount of medical care is wasted. I think everybody on both the right and the left agree with this point. At a given point in time you can spend a lot or you can spend a little, and it just doesn't make much difference. Look at Steve Jobs, one of the wealthiest people in the world, but he gets cancer; his survival probabilities are not that much higher than if you or I got cancer. All of that wealth does very little in the final analysis. We are all going to die, so it doesn't do anything in the final analysis. But even a few years, doesn't get him so much. I don't think Robin Hanson believes that--we did do that podcast on the singularity. Cryogenics. I'll work with you on that. I'll go with you. The second thing we know is that even though spending more at any given time doesn't buy you that much, medical research actually seems to get you an awful lot. So, the life expectancy in the United States has been going up, a little bit every year; it's fantastic. Even if we look at the gains from cardiovascular survivability--that's actually worth trillions of dollars. The fact that people are living longer is worth trillions. Not all of that is due to research. Some are just eating better. But some of it is. So, we have a potential to have trillion-dollar improvements by thinking about innovation. And yet, did that come up over medical care, in the debate over Obamacare? No. It was all about how to divide the pie, all about is the pie being divided equally. Does everyone have equal access to medical care? When thinking about it in terms of an innovation framework, it's: how can we invest, research, and develop new things which are going to save our lives? Which are going to extend lifespan? And the opportunities there are tremendous. And yet you look at the budget for the National Institutes of Health (NIH), for the National Science Foundation (NSF), and we are talking about $30 billion or something--it's a very small amount compared to what we spend on warfare and welfare. So, some of my best friends work there too; they're great people; I have huge respect for them. Is that money well spent? You say it's only $30 billion; if it were $60 billion, you think we'd get more return? I think it's much better spent than a lot of other things we spend on. And I do like--so, you and I would certainly be in agreement that we wouldn't want to centrally plan a science in any way. But if we think about how the NIH and NSF work, I think that much more coheres with our kind of Hayekian way of doing things in that the money is not centrally planned. It's distributed by peers. So, people make proposals to the NSF, and the NSF gets a group of scientists and engineers and they decide: are we going to fund this or not? It's not perfect, a lot of problems. But the guy at the top is not making those decisions. It's a much more decentralized process. It's got a separate set of problems. There's groupthink, there's fads, there's people honoring their own work implicitly to people who cite them. A lot of problems with that. That's life. But the question is, somebody like Michael Milken, who got cancer and launched a very large effort to solve prostate cancer through--my understanding is through very innovative techniques, outside the box. Didn't go along with what the NIH was thinking. So, I wonder--this is not a presumption, I just don't have the data at my fingertips: the amount of privately spent medical research money dwarfs what the NIH spends. We spend an enormous amount. Now, people debate that's on marketing of new drugs or how much of it is just application rather than fundamental research, and that's a relevant issue. But we spend a lot of money on research and development (R&D) in America. Do you want more of it going through the government? Well, I would like to see the government budget shift from warfare and welfare to more on innovation. So, that's what I think we need to sell. That's a story that Americans intuitively understand. Americans are very forward thinking, very progressive people; they like science; they are interested in a better future, thinking about the future. So, I think we could sell an innovation state. And I'd much rather have an innovation state than to be bombing--Libya? I think Libya's over. Iran is next. You are behind the times. So, just to get people's mindset to change. One argument against that would be that one of the major initiatives of the Obama Administration has been the creation in the green area of environmentally friendly stuff, that led to some disastrous--the story hasn't fully unfolded yet, but Solyndra example where a rather large sum of money was lent to a company that wasn't a viable institution at the time and turned out not to be able to pay it back. Right, so that's exactly the type of centrally planned science which I'm not in favor of. So, that was money going to a specific company with a specific idea; and at the final stages. I think the case for investing in really basic science, at a much earlier stage, where it's open to many different people getting peer-reviewed, not centrally planned, basic science as well as from the universities. Let's get those STEM graduates into the universities, let's fund that a little bit more. That's where I think there is a case to be made. And again, STEM is Science, Technology, Engineering, and Mathematics. Are we in there? Economics? Is that part of the "E"? We are not. But we are STEMish. STEM-like. Among the social sciences, grade inflation is much less in economics. True.
58:26One thing you didn't talk about which surprised me is the venture capital industry. So, one thing that distinguishes America from much of the rest of the world is venture capital, and in all this debate about the 1%, one of the great things about the 1%, wherever they get it from, and we've talked here about some of the 1%--it's not the same people, not a fixed group--but some of the wealthiest people in America by making the world a better place, and some earn it by taking it from the rest of us through the political process. But either way, because they have large amounts of money, we have in America the opportunity for venture capital, where wealthy people steer money into new enterprises. And that's rare. It's not common around the world. It is a huge source of innovation in America, that often benefits people around the world, because a lot of the medical devices and innovations that are going on, technology in Silicon Valley, they are funded by people making a bet; if they make a bad bet they lose an enormous amount of money, if they make a good bet they make an enormous amount. I love that system, I think it works well. My suspicion, and this comes from conversations I've had with venture capitalists, is that we've hamstrung, we've handicapped that industry recently through regulations that weren't designed to affect it but of course ended up doing it perhaps unintentionally. Such as Sarbanes-Oxley. So, we've made it much harder for small firms to go public. Venture capitalists I've talked to say that's not an option. Everybody now tries to get bought out rather than going public on their own. You get bought out by somebody who has already incurred the fixed costs of Sarbanes-Oxley and the legal staff that does that, and that makes it harder. We've closed off a route to come up with new products and ideas. Yes, I think there's a lot of cases like that. I think about innovation as involving ideas, money, and markets. It's bringing all those three things together, which really matter. The venture capitalist part of the industry is an incredibly important aspect of that. On regulation more generally, I think we tend to evaluate regulations one by one: Is this a good idea, is this a good idea, is this a good idea? And yet a thousand pounds of feathers--each one of them is light, but the whole thing is still heavy. And you can have a lot of good regulations together with one bad, one heavy weight. I think this is a problem in our mindset. Michael Mandel has a nice metaphor. He says: These regulations are like throwing a pebble into the stream. One pebble does nothing. But you keep throwing more and more pebbles and pretty soon you block up the stream of innovation. And 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 makes things more bureaucratic, committees in the small and in the large. Just look at what's going on in our politics. Look at something like the Hoover Dam. Let's put aside big government project for the moment. 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. We have so many players now who can say no, and almost no one who can say yes. The example I think is very telling in the book is how little innovation there is in airport creation in the United States. You can't build an airport in America; it's almost impossible. You can't build an overfly area. The costs are right not--it could be it's not productive enough; it's hard to believe. It should be extremely valuable. But it's clear there are a lot of costs, perhaps worthwhile. But your point is that the costs aren't worthwhile, aren't worth paying. Your point is that the nature of the costs are such that these interlocking aspects of it mean that the real cost is bigger than any one piece of it. Exactly. The real cost is getting all these groups together to an agreement, which is almost impossible. Just think about the infrastructure that we have. A huge amount of our infrastructure was built in the 1930s, 1940s, and 1950s, thinking about the interstate highway system and so forth. The infrastructure of our past to take us to the future. We need to build our own infrastructure and right now I don't even see us capable of doing that. I go to China and you see in China building going on everywhere--highways. And yes, I know, the highways are running through poor farmers' land. They are out of control, Alex. It could be a good thing we are not building our own infrastructure any more. We have too much of it already maybe. It's true they don't have any zoning laws, which I hate; nice conversation with Ryan Avent on how much these bureaucrat interlocking things keep innovation from happening--forget innovation--development is a simpler word here. That's right. But on the other hand, going to a world where a central cabal. It doesn't have to be public. Think about the Keystone Pipeline--you are not able to build that. So, there's a lot of private infrastructure which takes too long to build. We could build these airports privately, but it's just not possible. And here we have an increase in air traffic in the United States and this tiny bottleneck of airports where we cannot build another one. The last one that we built was Denver. Which was when? Like 1978 was the starting of that. It wasn't completed till many years later. I think it was a couple of weeks ago. So, people are still looking for their luggage. Meanwhile China is building 10-100 airports every year. That's not the way to take us to the 21st century. I somewhat agree. I think China, and Japan also--Keynesian zeal, they seem to like concrete a lot. So they are pouring a lot of concrete in those places, some of which is the people who pour the concrete or have a lot of friends.
1:05:17You make some recommendations at the end of the book, some of which we've touched on. Why don't you list them and just talk briefly about the ones we haven't talked about? Sure. So, we talked a lot about patents, and I think we just expanded our patent system too much. We need to prune back on patents to actually leave room for more growth. We need to pay teachers better and in return we need to demand better teachers, more accountability. And this means more charters, more vouchers, more private schools as well. A more competitive, flexible, and open system. We've pushed college as the totem, as the only way to be educated. It's one way of being schooled. It's not the only way of being educated. We need to think more about alternative ways of education, including apprenticeship programs and including focusing education more on the STEM fields. We didn't talk much about immigration. Perhaps because high-skilled immigration I think is such an obvious, such a completely clear thing to do, that it's shocking that we haven't done it already. It's literally easier to win the lottery than it is for a person of advanced and high skills to get a visa into the United States; and what I mean by that is we give out more visas in the lottery program--random allocation--than we do to these people of extraordinary ability. Now that's insane. How can you have a system like that, where you just randomly give out visas and there's more of them than you give to people of extraordinary ability? That's crazy. We need to cut back on regulation and we need to think about it as not simply thinking about regulation as each regulation comes up. We need to think about pebbles in the stream. We need to think about what happens when you accrete, what happens when these things build up. I would like to see us change our mindset from the warfare-welfare state towards innovation. I do believe that Americans are an innovative people. They are a forward-thinking people. They believe in making the pie bigger rather than in fighting over dividing the pie. So, I would like to see a politics which emphasizes innovation more than it does all these other things we've been talking about.

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COMMENTS (30 to date)
Hans PUFAL writes:

Great talk (as usual). The comments about immigration reminded me of this post I recently read about a trio from England coming to San Fransisco and establishing a company with $400,000 seed funding but have to leave the US because they cannot get H1B visas.

Pure madness!

munger>hayek writes:

On the section of teachers, couldn't we get more high quality teachers without spending more by removing licensing law? Paying more would certainly get higher quality people to become teachers out of college, but people changing careers are still going to see teaching as a barrier if they have to go back to school to get an education degree and take off of work to student teach.

MF writes:

Listening to podcast like these is exhilarating experience. The parts on education and intellectual property were really interesting. Thanks!

Podgursky writes:

RE: Relative teacher compensation

Interesting interview. I look forward to reading the book. However, based on the interview I’d encourage both Russ and Professor Tabarrok to look at a recent AEI paper by Jason Richwine and Andrew Biggs:
http://www.aei.org/files/2011/11/02/-assessing-the-compensation-of-publicschool-teachers_19282337242.pdf

In it they show that when teacher benefits are costed out correctly, the total compensation package for teachers exceeds that of comparably educated private-sector employees. It’s a carefully done study that deserves attention.
(I'd encourage Russ to devote a podcast to an interview with one of the authors.)

A second factor overlooked in historical narratives about teacher pay and quality is the tradeoff with staffing ratios. The student-teacher ratio in public schools in 1960 was 25.8 (Hanushek, 1986), now it’s 15.7 (NCES website), while real spending per student grew by over two percent annually over this period. School districts clearly took a quantity over quality strategy in staffing. If schools would just return to the student-teacher ratios of the early 1980’s, it would be possible to raise average teacher pay to almost $80,000.

Nick writes:

@munger>hayek

In most states you only need a degree in the subject you plan to teach with the exception of the early elementary ed. teachers.

That is to say if you have a bs in biology you can get a job as a middle or high school teacher in the sciences. the dept of education in most states can issue a temporary certificate for a few years until you take the night classes ,etc.. needed to earn a teaching certificate. This cost is often reimbursed by the dept. of education anyway.

Bogart writes:

You mentioned the word entrepreneurship one time in the article and the word entrepreneur zero times. The most innovative system known is the market process where entrepreneurs attempt to satisfy the desires of fickle consumers and not violate the private property rights of others. So it seems to me that any attempt to spur innovation outside of freeing the market process will produce a marginal increase in the innovativeness of society at best and bad unintended consequences at worst.

I think the focus on managing education to some preferences of some pool of experts (bureaucrats) is really an inferior way to improve the innovativeness of society compared to the market process. Of course improving education is a vastly superior mechanism to spur innovation than to have innovations trickle down from the military/intelligence/police state apparatus and almost certainly superior to having innovations trickle down through the welfare state apparatus.

I have no statistics to back up my opinion here but I have an anecdotal example that you mentioned in the podcast. The somewhat free market produced innovation of the electronic book reader that reduces the energy and waste in the production process of paper books and articles is superior in "Greeness" to just about any innovation in the subsidized electric car programs of the Government-Selected Business consortium.

drobviousso writes:

How can someone reconcile "Your point is that the nature of the costs are such that these interlocking aspects of it mean that the real cost is bigger than any one piece of it. Exactly. The real cost is getting all these groups together to an agreement, which is almost impossible." with the term "Innovation State?"

With all due respect, "innovation state" sounds more like an Orwellian term than a realizable goal.

Dan writes:

This was one of my favorite recent podcasts. The combination of a good guest and a number of interesting, well-reasoned ideas.

I am happy to see the merits of the sacred cow of intellectual property finally being questioned and reduced to the utilitarian balancing issue that it should be instead of all the usual moralizing about "stealing" and such. If it can't be clearly demonstrated that patents and copyrights in certain fields are economically necessary, then they should be abolished and the monopolies removed. At a minimum, I don't know how anybody could argue the guest's point that patents should be for varying term lengths - the universal 20-year term is prima facie evidence of sloppiness by Congress (or worse). Furthermore, if you're a strict Constitutionalist, I don't know how anyone could argue that copyrights for the entire life of an author plus 70 years is a reasonable interpretation of the phrase "for a limited time." Keep asking the hard questions!

Giovanni Battistini writes:

I agree with the impact education can have on innovation. I wonder why nobody ever points out that countries like Germany or Norway that do better than the US in high-school drop out rates invest more resources in early childhood education. Although we know well that the first few years of life are the most important for brain development, we still ignore the fact that we could have the highest ROI on education by investing in pre-K support. How much money would we save on special education? How much more effective could we make k-12 education?

Bradley Calder writes:

Thank you so much for another great year of podcasts. I graduated 2 years ago from the University of Rochester with a degree in economics and now live in China, about as far away from school as you can go, but thanks to you and your guests I feel like I never left. I do not mean to impose too much, but please continue to make these for as long as you can.

新年快乐
-布蓝宝

Ben writes:

Could the fact that less Americans go into engineering and similar type disciplines less than they used to be due to the culture shift in the past 50 years. I am not old enough to remember the 60's, but I imagine back then parents and teachers didn't give the advice "do what you love", as often as they do now. Could it be that young students follow the advice given to them and go into fields they find interesting, but that those fields aren't always the "employable" ones?

drobviousso writes:

Ben - I think it has to do with the way science and math is taught in highschool. I love engineering and science, but was bored to tears with it in high school. We didn't 'do' anything, just sat there and read out of a book.

In the real world, engineering is all about 'doing' something. Building, breaking, or designing, and I didn't do any of that anywhere but in my programming class (of which like 8 of my classes 400 students took). Physics, chem, stats? It was all memorize and regurgitate. And I went to a good public school.

Daniel Gressel writes:

I think part of the explanation for the decrease in productivity growth since 1973 has to be the increase in regulations whose cost is greater than benefits. Note that the EPA was started in 1970. A second reason has to be the increase in difficulty in getting a large project through all the various approvals needed. A third reason has to be the increase in the US corporate income tax relative to foreign corporate income taxes.

Ben writes:

drobviousso
I agree that high school classes could be presented better and making them more applicable to real world problems would help make them more interesting, but are these subjects taught differently now than they were back when US schools were top of the line?

Maybe I'm being too harsh, but I think some subjects that are important just aren't exciting and there isn't much you can do to make them so. The only way to succeed is to put forth an effort and kids aren't forced to do so like they used to be. Instead there are tons more distractions available (TV,computers,phones, etc.) and unless there is a forcing of course a kid would rather do something other than go through math problems.

Engineering can be an exciting field, but you need the basics (math, science) that really aren't all that exciting to a lot of people (I happen to love math, but can understand why a lot of people don't).

a banana writes:

I was disappointed to hear Tabarrock's intuitive argument that progress has clearly slowed. Like Tyler Cowen, he doesn't bother to look things up.

For ecample, he says that 1950 was essentially modern life. he added that "there were a few computers around." Actually, no, there weren't. The first commercial computers to a couple of univesrities were in 1951.

Yes, airplanes existed, but almost no one but the upper 1% flew and commercial international flight only started in July 1950.

Almost no one owned a TV in 1950. 1 million sets were sold in 1949 and 6 million in 1950 - but most of those were Chritsmas presents. again, only the very wealthy were watching in 1950.

This kind of analysis needs serious studdy, not off the cuff statements from Tabrrock and Tyler.

drobviousso writes:

Ben - I get what you are saying, especially about math and some forms of science, where you really do have to just sit down and practice. But practice isn't the same as memorization and regurgitation.

Martin Brock writes:

Unlike most books discussed on the podcast, I've read this one, so I'll first comment on its form and substance. I like the abbreviated format and feel the read is well worth the three dollars I paid for it. Airline flights are one of the few opportunities I take to read recreationally these days, and I was able to read the book on a relatively short flight. I'm not a professional economist and don't need more exhaustive coverage, but the footnotes are there if I want to follow them. I especially liked the discussion of education. It stimulated a vigorous (if not heated) discussion with my wife the public school teacher.

Some patents seem defensible theoretically, but the reality is so far from this theory that I'm practically anti-patent in principle. Specifically, I wonder whether drug patents are as defensible as Tabarrok claims. Regardless, he argues well that patents are too broad and too indiscriminate. He suggests patents of varying duration for example, but why grant a patent monopoly for any fixed duration?

Why not instead require the applicant for a patent to document the cost of an innovation and grant him a monopoly only until he has recovered the cost plus some margin, say a few hundred percent of the cost, not more than a thousand percent? The patent holder must also account for his cost recovery and profit. If he recovers the cost plus the statutory margin in a year, his parent expires in a year. Any would-be competitor might challenge his cost accounting in court, and consumers generally may challenge the accounting in a class action suit. Keeping the lawyers employed is not a problem.

Why not grant anyone credibly documenting the same innovation a patent, permitting an independent inventor to compete without licensing his own invention from someone arriving first at the patent office? Tabarrok addresses this question in the book. If one claimant denies the independence of another claimant's innovation, the first claimant may challenge the second claim, but the first claimant has the burden of proof. Here again, there's plenty of meat for the lawyers.

John Berg writes:

As an exercise for the reader, I recommend going through the podcast transcript with a highlighter and highlighting every undefined word or concept. Do not bother with "innovation" since everyone knows what that is.

John Berg

Phil Segal writes:

Re the idea of discounting college costs for STEM fields. In fact, many schools do offer students substantial discounts in these fields at the graduate level. For example, my son and daughter- in-law attended an Ivy League Engineering program with no tuition charges. In fact, with lab and teaching assistantships, they were actually paid fairly well. This was not a fluke, they were offered similar benefits at several high level engineering programs. On the other hand, one daughter attended grad school in education with limited financial aid (primarily loans). Another daughter chose not to continue for a Masters (in Fine Arts) after she did her own cost/benefit analysis.
Admittedly this is more anecdotal than a scientific sample, but I suspect the experience is representative of the education marketplace at the gradaute level.
As for the decline in teacher quality over the years, I agree that women now have more choices that may attract them away from teaching. Likewise, they have more alternatives to the other female dominated field of the past, nursing. Instead of becoming nurses, many of the best women now are physicians, med techs, etc.
However, we'll know that teachers are paid enough, not when we compare their salaries to other similarly educated professionals, but when more and better men and women are attracted to teaching.

taxpayer writes:

"We've seen an increase, 21st century--25% of males not graduating high school."
I was shocked to hear this, looked up the data at http://nces.ed.gov/programs/digest/d10/tables/dt10_115.asp where the stated rate for males is 9.1%. This is for 2009, latest year reported. Recognizing that definitions can vary and things could change over a couple of years, but what is the source for the 25% figure?

Brad Hutchings writes:

The IP discussion was mostly spot on. The one detail I found laugh out loud funny was using Google as an example of patent portfolios gone bad. When Google entered the mobile phone market with its Android operating system, it had a very weak patent position. Two years ago, when Android phones went mainstream with original Motorola Droid and HTC Nexus One, and began gobbling up market share, Apple responded with International Trade Commission complaints and lawsuits against Motorola and HTC.

Steve Jobs' recent biography reveals what many felt at the time, that these legal actions were much more personal than about business or even protectable IP. He resented "being copied". I guess he wouldn't make a very good fashion designer. Since then, Google has been on a patent buying spree so that it could respond in spades to a direct assault from Apple, and so it could assign patents to its licensees to help defend against Apple assaults. Microsoft has also found an interesting licensing play with Android handset makers, though it's more defensive than retaliatory.

And then there is Oracle, which purchased Sun, the inventors of the Java programming language and associated environments. When Sun was just Sun, they were more than happy that Google was going to use Java in Android, and behaved as if a deal had been done. Oracle bought them, and Larry Ellison apparently decided to do his friend Jobs' bidding on that front. The interesting patent portfolio development there is that IBM has been selling database related patents to Google that could probably cripple Oracle in a retaliatory suit.

I'm no fan of software patents or these giant portfolios amassed by big players. But I don't see the problem as big player versus little guy. It really hasn't played out that way, and you probably won't find an example where Google, in particular, pulled garbage along that line. However, nobody, from small, independent developers to the giants like Google, Microsoft, and even Apple, can write any interesting code or develop any interesting product, without materially violating some claims in some patent. Standard practice of developers in large and small companies alike is to build the product, ignore the patent issue, and let the lawyers sort it out. In a big company, the lawyers might do some due diligence on competing products and what patents they might assert against them if legal hostilities break out.

To be somewhat fair to Apple (which I admittedly despise because of its belligerence in Jobs' final two years), all the huffing and puffing couldn't stop a market share slaughter by Android phones. Business-wise, it may prove better to have captured market share and pay some undetermined price in litigation and penalties later than to have sat back and accepted Apple's assertion that it deserved a monopoly on all touch screen smart phones. Point is that few market participants really respect this kind of IP as "property", which can't be terribly good for its long term prospects.

Brian Dexter writes:

Listening to this podcast on innovation made go back to a re-listen to the November 7, 2011 podcast on inequality. The statements and figures used in this podcast to support the premise that the U.S. suffers from 'innovation stagnation' since the 70's run counter to the statements and figures used to 'debunk' the claim that income inequality and standards of living have been stagnant since the 1970's. Its true that the changes in the world before the car and after the car were great compared to the world with cars in the 1970's and the world with the car now. But I don't want to go back to cars of the 1970's because the improvement and innovation in cars has been significant. Now that we have the road network and infrastructure built for the car, there is no incentive to make a larger leap. Does that mean that there is less innovation achieved since the cars'adoption? Or is it simply that the innovation has been applied to a mature system and product category?
Also, wondering if productivity is the correct measurement of the level of innovation? Most of us do things we never would have even thought of in the 1970's with new devices and technology. Our old tasks remain, while new tasks have been added. How do you account for how much more everyone can do, and is expected to do, within the same essential job compared to the 1970's?
As a designer and patent-holder myself, I agree with many of the points made about the weaknesses of the patent system. I have often seen new ideas stopped before development because their potential for patent protection was weak, even if their potential value was high. But I have seen a trend toward more public disclosures of ideas to prevent patent-filing, and also an increased reluctance to defend patents already awarded because of the inter-connected relationships between businesses, who are often competing and cooperating at the same time.
Now I have to listen to the podcast on the fashion industry referred to in this podcast. I was surprised to hear the fashion industry used as an example of 'innovation'. It is certainly a 'creative' industry, like entertainment. But I don't think of the fashion industry providing 'innovations'- inventions that change or improve consumer's lives. Certainly the textile industry provides innovation in chemical treatments, coatings, and construction. But how a dress is made and the purpose and value of a dress remains pretty constant no matter how often 'styles' change. Maybe this is a case of over-using the term 'innovation'?
Great podcast!

RJF writes:

The conversation about college education and the fields studied reminded me of the famous quote from John Adams:
I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

T. Sean Schulze writes:

In the podcast much is made of the students who are studying Psychology and similar social science fields in preference to the STAM fields. I think you have misunderstood the dynamic in the students' choice of subject. Today's student doesn't select Psychology as her major necessarily because she wants to become a psychologist so much as she chooses a major she thinks she can get a good grade in so that she can demonstrate to a prospective employer that she is of high quality. That employer could be a firm in the psychology field, but more likely it is an office supply, home improvement or clothing retail chain that has determined that its higher paying positions should be filled by college graduates, regardless of their field of study. We can't fix education until we adjust the expectations employers have on the people they hire.

I would be interested to learn if any economists are currently studying what the relationship is between the field of study of US college graduates and their subsequent fields of employment. I suspect that the STAM graduates will be found to be working in their fields, whereas social science majors will be found to be low- to middle-level managers in some activity only very tangentially related to their fields of study, if at all.

I question Giovanni Battistini's experience with the German educational system, since the Germans often wonder at the US emphasis on actually teaching children in pre-school and Kindergarten rather than just having them experience early socialization (i.e., learn to play well with others).

As for the Welfare/Warfare State, if we reduce the amount of tax dollars given to welfare/transfer payments and defense, why do we have to redistribute it to some other field of "government." Why can't we just give it back (or stop taking it from) the people and let them independently subsidize innovation (e.g., buy more iPads)?

John Strong writes:

Pay teachers more? How about paying students instead?

We should just create a battery of tests and pay people to pass them.

As Brian Caplan says, people want policies instead of results. As Bruce Yandle says, people care more about prescribing ecological technologies than achieving a clean environment.

Why would it be a good idea to use performance-based standards for clean water but not for education?

Christian writes:

Another field in which there is plenty of "innovation" but virtually no patent protection: finance! Maybe "innovation" isn't always a good thing.

Scott Campbell writes:

Great subject. Great ideas. I would like to add my thoughts. Alax Tabarrok suggested that our teachers should be paid more.
I Suggest that they should be able to earn more. I submit that this can be accomplished by rewarding students for achievement.

The state board's decides which curriculum they will subsidize by awarding educational grants to be awarded only to the student for achievement. No overhead can be withdrawn.The district's
decides which achievements they want to pay for and the effeciencies of the process. Teacher's decides what course(s)and how many students they want to teach. The student's decide how well they want to perform. All of the money funded will be
allocated to students for their relative achievements. (notice: No federal anything)

The parents at first, then the student's get to choose the school, course and teacher. It must be a curiculum and performance based award system. Those students who accomplish the set goals and achieve the highest grades are awarded the most credits realitively.

The teachers earn their wages and operational funds through which and how many students select them as a teacher.Teachers are allowed to bid for the school they want to teach at. The schools are funded by the state at a general level for space and operations. Administration, Curriculum and facilities are afforded by the district through the teacher's bids. No outside or supplemental funds are allowed.

The challenge will be to determine whether or not the states, counties,and districts will work togather to equalize the environments, enforce
the accountability, publish, and punish violations.

The standards are high, the accountability measurable, and the educational funds zero sum. The student's ability to qualify is not relative to their out-of-school wealth. All educational funds are localized.


This would not preclude or prevent extracurrucular preperation by student, parent, district, county, or state. We want achievement and performance. We want accomplishment and advancement. We want success and honor.

The motto must be: The Highest Achievement at The Highest Integrity.

The advantage of a bottom up funding system is that overhead is minimized and corruption at the administrative level is reduced because performance rather than position is valued. Accountability rather than suitability is determined, and mostly because service rather than power is rewarded.

The operational philosophy is that nothing is fair and the choices I make have consequences. If I choose not to perform at my highest level possible: If I choose not to participate in the best activity available; If I choose not to be in the best places affordable then only I am responsible.

The objectives are to facilitate the cream rising to the top, the milk to be filtered too the highest quality, and the milking process to be equitible and consistent. What the product is and what happens to the rejected product is the measure of the society that produces it.

We should not sacrifice quality for medocrity because of the cry for fairness rahter we should seek excellence by measuring the magnitude of the ineqity in the student's agreement to split the pie.

John Strong writes:

Scott Campell says:

"All of the money funded will be allocated to students for their relative achievements ... The teachers earn their wages and operational funds through which and how many students select them as a teacher."
Hear! Hear!

If we gave money to students (and their parents), they would be free to hire teachers (or not hire them) as needed.

I believe in public education. I just don't believe in public schools.

Damian writes:

I question the claim that gobbling up patents so lawyers don't sue will prevent the little guy from innovating. It seems to me that the little guys have nothing to worry about UNLESS they innovate. No one sues a little company over patent infringement if the product doesn't sell. But create a Facebook, and the lawyers wake up.

Ray G writes:

Great podcast. A good follow up would be an interview with Matthew Crawford on his "Shop Class As Soulcraft" book.

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