Underrated Transformations- More Than Meets the Eye

EconTalk Extra
by Amy Willis
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Tim Harford on Fifty Invention... Simeon Djankov and Matt Warner...

elevator.jpg This week, EconTalk host Russ Roberts welcomed back Tim Harford to discuss his new book, Fifty Inventions That Shaped the Modern Economy, based on a BBC podcast series he did by the same name. Their conversation (and Harford's book) is a whirlwind tour of the mundane, and that's exactly what makes it beautiful. According to Harford, his goal with each of his 50 picks was to "teach people a lesson about the way the world economy works through the medium" of each invention. Their chat is full of economic "mysteries," such as, "Why is Manhattan one the greenest cities in America?" And "Why is it better for the environment to ship juice boxes rather than oranges?"

So let's hear what you took away from this week's conversation. Pose a question, suggest a new economic "mystery," or answer one of ours. We'd love to continue the conversation.

1. Both Roberts and Harford muse that we don't even know that names of many of the people who originated these transformative inventions. In thinking about invention and innovation, why do you think we have a tendency to think in terms of the spectacular?

2. What does Harford mean when he says we should think of the elevator* as a mass transportation system? (You may want to revisit this episode on skyscrapers with Jason Barr, a favorite of both Russ and mine.)

3. To what extent do we owe our iPhones to the government? What sorts of policy implications does this suggest? What sort of policy suggestions would you offer in response?

4. What gets your vote for the most transformative yet underappreciated invention? Do you have any quibbles with Harford's selections? (For example, what about the TV dinner versus the washing machine?)

* Bonus Question: Harford suggests (channeling Bessen) that the elevator operator is the only job ever to be totally replaced by technology. To what extent do you think this is true? Any other/counter examples?

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COMMENTS (8 to date)
Shai Revzen writes:

Russ,

In the podcast you and Tim discuss your discomfort with the positive externalities of "big government" DoD spending vis a vis how those contributed to the development of the smartphone. I wanted to point out that, having experience with both the tech industry and DoD funded academic research, there is a fundamentally different sent of incentives for people doing R&D in those domains.

In industry, the R&D I have encountered was primarily focused on clear business cases. Incremental technological improvements with clear bottom line gains would always win the day over high risk, unclear reward proposals.

A lot of defense research is very different. Among the various agencies that fund academic research the DoD agencies are generally known as expecting, even demanding, high risk high reward proposals. When your goal is to have an ace in the hole that your geopolitical opposition cannot counter, it makes sense to spend money "unwisely". The only guaranteed payoff you get is training the next generation of scientists and engineers. Once in a while, one of these crazy ideas will have a game-changing payoff -- often an unexpected one, which gives your side an edge for a few years.

There is a tension there for the free market proponents: only a corporate "behemoth" (near monopoly) or a government can afford extremely high risk R&D. Yet only those kinds of research activities produce game-changing levels of economic growth in the long run. This is why only behemoths -- Xerox, AT&T and IBM in late 20th century; Google and Microsoft in the 21st -- have meaningful research groups that compete with academia for producing truly fundamental innovations.

As an economist and free-market proponent, how do you suggest fundamental scientific advances which require high-risk innovation be produced by our society? or do you think we, as a society, are better off with how market forces would allocate those resources even if far less fundamental science was done?

Per Kurowski writes:

Before 1988, the Basel Accord, for more than 600 years of banking there was nothing like the risk-weighted capital requirements for banks that so distorts the allocation of bank credit.

Question 1: What would banker Templar Grand Master Jacques de Molay, burned in 1307 by Phillip IV have to say about Basel I’s 0% risk-weight of sovereign?

Question 2: Why precisely did Basel II, in its standardized method, assign a such meager risk weight as 20% to the so dangerous AAA rated, and a whopping 150% to what is rated below BB- and therefore made so innocous to the bank systems?

Question 3: Since Basel II in 2004 split up the private sector, by assigning risk weights of 20%, 35% and 50% to The Safe and 100% and 150% to The Risky, how many millions of risky SMEs and entreprenuers have gotten their credit application denied as a direct result of this odious regulatory discrimination?

Kevin Ryan writes:

Tough questions.

At least I can try number 2. Harford is comparing a skyscraper whose floors are linked by elevators to a series of one storey buildings linked by a bus/train/pooled taxi etc. Implicitly the former is much more efficient.

(Incidentally I see that commenter Robert Swan made the comparison with self driving cars in the Jason Barr podcast)

Per's nomination of the bank capital adequacy regime had me scratching my head, so I will comment on this. In my view the development of a 'Too big to fail' philosophy has been hugely important in facilitating the development of our credit based economies; and so I would nominate this instead. Note that this is another "invention" of governments.

I suspect the importance of the Basel regime is overstated. Credit rationing always has to take some form and the Basel risk weighted regime has to compete/interact in practice with other measures such as banks' policy rules for acceptable credit, pricing, internal capital models, non-risk based limits, funding constraints. So even identifying the counter-factual for the impact of Basel risk weights is hugely difficult. When you add in additional complications such as the use by large banks of internal ratings approaches and different national implementation of the international rules then Per's question is, in my view, unanswerable.

Easier to give a simple answer to Per's question 2. Then key members of the Basel Committee bought into the long running argument by the banks that more risk differentiation in the capital regime was justified and that this should be based on what (many) banks were doing, in which risk was correlated with expected (credit) loss.

As for his question 1, Per is of course right to imply that the notion of zero risk for sovereign lending would have been incomprehensible to de Molay. (But I suspect he would have found the entire capital regime incomprehensible, including the notion that bankers wanted to be able to leverage up their lending to a large multiple of their own resources)

If he came back now, de Molay might be able to conclude that the type of gangster state he, (and other medieval actors in a similar position such as Jewish moneylenders), had to deal with no longer existed in Europe. Or, maybe not! He probably would not have been surprised to learn that the people who made the rules that said that lending to governments was risk free were the governments themselves. He might also conclude that the familiar risk of lending very large sums to governments who you could not oblige to pay you back, was still there and had not been solved (and was unsolvable) by arcane capital adequacy rules.

Kevin Ryan writes:

For avoidance of doubt, the fifth para of my previous post is referring to Per’s question 3

Brice Fuqua writes:

Michael H. Hart in his controversial book, The 100, named Tsai Lun, the Chinese monk who invented paper as the seventh most influential person in history. Hart's reasoning was that paper was never invented independently, probably due to the complexity of the process. So, without Lun's discovery we might never have obtained paper. He makes many of the same claims about paper that you do in the podcast.

Dr Golabki writes:
1. Both Roberts and Harford muse that we don't even know that names of many of the people who originated these transformative inventions. In thinking about invention and innovation, why do you think we have a tendency to think in terms of the spectacular?
I think there's a education gap. Science classes are mainly concerned with science, not the history of science, because that's what scientists know and like. History classes mainly omit the role of science and scientists because Historians generally don't understand it and aren't interested in it.
2. What does Harford mean when he says we should think of the elevator* as a mass transportation system? (You may want to revisit this episode on skyscrapers with Jason Barr, a favorite of both Russ and mine.)
For skyscrapers to work you need to be able to deliver people efficiently from the 1st floor to the 40th floor, and stairs aren't going to do the job. Interestingly, because elevators have a narrow scope of use (1 building) it's easy to have this type of mass transit owned and maintained privately (by the person or association that owns the building). I wonder if there's a similar private model subways, where everyone living within X distance of a subway station would collectively own the line. Seems like a challenge given you'd have thousands of households at a minimum. Is there a cut point for private v public ownership where after a certain number of households it becomes simpler to own/manage mass transport through local government?
3. To what extent do we owe our iPhones to the government? What sorts of policy implications does this suggest? What sort of policy suggestions would you offer in response?
To get an iPhone you need both.

There a types of research (those that have both significant cost to develop and long-term/non-obvioius payoffs) that will never be adequately funded by private means. If you want proof, here's a brief play I just wrote titled "The Investor and the Capitalist":

Inventor: I need a billion dollars for research over the next decade or two
VC: That's a lot of money, when will we see a pay off?
Inventor: I don't know... somewhere between 10 and 50 years from now.
VC: Hmmm... that's longer than our usual target pay back period... by a couple decades. I guess you have a high degree of confidence in the technology though, right?
Inventor: Oh, absolutely not... it's very uncertain if this research will yield anything of interest.
VC: Okay... that sounds risky... but surely you must have a great product idea, what is it?
Inventor: I don't really know. I have a couple thoughts, but most likely the main product will be something no one, including me, has ever thought of.
VC: You are clearly a dangerous lunatic and I'm calling police.
Some things just don't have a viable business case.

But that said, there are obviously other types of innovation (incremental, consumer focused) where government won't get it done. The iPhone itself was taking a PDA and a cell phone (both which we had already had for about a decade) and combining them. That's not a brilliant technological innovation. The innovation was in the design and engineering to make it beautiful and easy to use... something the federal government is clearly terrible at doing.

4. What gets your vote for the most transformative yet underappreciated invention? Do you have any quibbles with Harford's selections? (For example, what about the TV dinner versus the washing machine?)
My quibble with the TV dinner is that what Harford really meant was "all of food science and supply chain technology", and he called it "TV dinner" to be provocative. It's a bit like saying "viagra is the most transformative invention" and then defending that position by attributing all of medical science to viagra.

Couple votes for me:
First, plastic. Such a pervasive material we don't even notice it. Cheap, durable, flexible, able to take almost any form.
And second, in my own field, PCR, which was invented in the early 80's and enabled all modern biological/medical research.

Dallas Weaver Ph.D. writes:

Russ,

An interesting discussion.

We need to keep in mind the effective definition of Invention or Idea as actually incorporated in all the economic growth models is not the same as the common language use of those terms. An Idea (A in some models) is really an idea that also passed through all of the following filters and became economically significant:

* idea was scientifically sound
* it was economically sound and made economic sense
* it had a viable market
* it could be financed or implemented by someone with financial capacity
*had reasonable appropriability of financial gains (could make a profit)
* someone would try and implement the idea

PLUS in today's economic reality
* obtained permissions from half a dozen agencies, zoning official, regulators, and activists
* didn't require changing standards controlled by some of those who would be harmed by the Idea's implementation
* didn't stir up environmental activists and dozens of other "stakeholders" who have effective veto power
* was profitable enough to bother going through the permission phase above.

As raw ideas (common usage) are growing exponentially with scientific knowledge, the slow step in the process of economic growth via new IDEAS (economic sense) has become the non-technological "PLUS" filters slowing/stopping real innovation.

When talking about the DOD contributions, the word idea was used in the common usage and none of those examples would be classified as an "IDEA" in the economic sense. As I read about "IDEAS" in the economic growth literature and how total factor productivity is interpreted, the DOD only did an insignificant part of the "IDEA".

Take FFT (fast Fourier transform) discussion, for example. Fourier transformations and other transformations had been around for over a century and were used in a variety of sciences and electrical engineering where they were very useful. The development of the FFT algorithm allowed rapid analysis of large datasets to go from the time domain to frequency domain and back again. If this wasn't done by DOD it would have been done anyway by some researcher.

The DOD and government get too much credit for their R&D contributions in most areas. Even on the internet, the original protocols were great in creating a robust system that could withstand a nuclear attack taking out many nodes, however, they also depended too much upon trust in the validity of the messages between trusted sources. If it was designed from the bottom up today with commercial/financial use in mind where you can't "trust" all sources, it would be far more robust against hackers but probably less robust against nuclear weapons.

I got a kick out of mentioning AT&T bell labs inventing the transistor and so many other things while noting that the monopoly phone companies were the last of all the electronic industries to utilize the transistor. While my guppy fish hatchery was fully automated with all solid-state electronics running hundreds of devices, my GTE phone system (in a major city) was still using mechanical switches that failed when it rained.

By the mid 80's my cousin was green with envy at the chips in my Mac computers being so much better than anything he could use in the design of the electronics for our military jets.

Raw ideas for the scientifically competent in today's society are very easy, which is why you don't know their names. Getting an idea through regulatory limbo is the slow step in creating an "IDEA" in the economic sense.

Richard writes:

Russ . . . I've urged you a couple of times by email over the past few years to explore the debate about the productivity of government research in generating all these socially and economically wonderful technical innovations in our lives. I think focusing on that question could make for a very compelling podcast (or two if proponents of the two sides were hosted separately, perhaps consecutively).

The big question is whether government research crowds out private research -- and whether it produces advances of greater or less value than the private sector would have generated had the research resources government scarfs up been freed to work in the private sector. That's a counterfactual question, of course, and hence challenging and open to disagreement, often vehement -- but there is cross-sectional and historical time series (some a bit impressionistic).

The starting point for any "crowding-out" argument is that the resources -- mainly skilled scientists -- are not infinitely elastically supplied. There are limitations on personal interest and aptitude, as well as appropriately preparatory educational experience within any fixed population. Hence, if the the government hires a significant share of the top talent, that is bound to crowd-out private research, directing it one way rather than another. That wonderful discoveries might result simply begs the question of what similar (or different) wonderful discoveries we're missing.

One public intellectual who adopts the view that government research is great has been Fareed Zakaria -- I can't count how many times he's pointed to the GPS system as prima facie evidence that starving publicly funded basic research would deprive us of technological progress.

Here is a link to an email I sent you on 12/8/16 urging Econotalk to pursue this idea, citing specifically Prof. Mazzucato who was featured in a chapter of Tim Harford's book (and has been a high-energy, high-profile advocate of crediting the government for all kinds of innovation, without really acknowledging the opportunity cost) -- it contains a number of internal links that set out this debate: https://drive.google.com/file/d/1ZVgFYVDCANjWbIbm9cNhgtP6nJdOV64s/view?usp=sharing

On the merits of the competing arguments rests the policy justification of NIH, the space program, and a lot of military research (potentially), at least in the current form of each. I'd sure like to see the advocates of the two diametrically opposed views pressed on their premises.

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