Category Archives: Growth Causes and Consequences

Mokyr vs. Phelps

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Joel Mokyr’s review of Mass Flourishing (ungated version, anyone?), and it is not glowing.

Mokyr refers to Mariana Mazzucato’s The Entrepreneurial State, which argues contra Phelps (and contra nearly everyone on the libertarian side of things) that the state has been the font of much innovation.

Mazzucato’s bullishness on government as a source of entrepreneurial flourishing is a strong antidote to Phelps’s dismissive view of corporatism as the source of all evil, although her enthusiasm for state-led innovation is at times overblown; the truth is somewhere in between. Like a bad marriage, innovation and the State cannot live with or without one another. It is a standard dilemma for all capitalist societies.

There must be something about Phelps–style, substance, or both–that puts people off. Recall that he received a lot of pushback when he spoke at a dinner last month. My own review was more on the positive side.

Mokyr locates Phelps’ antipathy toward Schumpeter:

I argued at length in Mokyr (2002) [that] It was not either science or business, but the realization that there are huge complementarities between them that led to success. Phelps notes that Schumpeter made this very point, but then dismisses him as a “pied piper” who misled historians and the general public (p. 10).

Innovation

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Yesterday, I attended a discussion held at the Hudson Institute on the topic of innovation. I go to these sorts of things because every once in a while one hears a stimulating idea. Most of the time, one doesn’t, but for me the occasional gain makes up for the frequent loss.

This was for me one of the winners. I will assume a Chatham House Rule, and not associate ideas with names. Some ideas that came up.

1. The presumption is that more innovation undertaken in the U.S. would be better for us. The main fear is that innovation is being held back by cultural and regulatory factors. Assuming that you want the innovation to occur in this country, then encouraging highly-skilled, entrepreneurial immigrants would seem to be the most reliable, least politically fraught way to make that happen.

2. In the area of science, government funding is a two-edged sword. Perhaps we have gotten to the point where the academic community in this country now selects for grant-writers rather than for people who can think outside the box. The most extreme claim was that the last 30 years have produced a “massacre” of genuine innovative scientists at our universities.

I did not bring this up, but I would be happy to offer macroeconomics as an example to illustrate that the use of the term “massacre” may not be too strong.

It had not occurred to me that part of my inability to fit in with academia might be that I might be too willing to challenge the status quo. But it sure would be an affirming notion to believe. Indeed, given my memoirs, I am prepared to consider that perhaps my willingness to challenge the status quo was better received at Freddie Mac in 1988-1994 than it was in academia. Not that Freddie was exactly all gung-ho for innovation (nor should it have been), but compared with the DSGE cartel…and then, just when I was getting worn out from trying to be an “intrapreneur” at Freddie Mac, along came the Web, with the opportunities it opened up for challenging the status quo. hmmm….

3. Maybe where we need innovation is in the area of sovereignty and governance. No, I was not the one who brought this up–someone else did. From that person, I got a tip about some literature that was new to me. I’ll let you know if it proves interesting.

4. Is innovation the product of just a small proportion of the population, or does the entire cultural milieu matter? What if these days, in order to be a significant innovator, you need to be in the 99.5th percentile in terms of cognitive ability?

5. One participant claimed that the existing telecom regulatory structure (the FCC, primarily) has slowed digital communications progress by ten years. Although I often think that markets find a way around regulation, I am afraid that I found this estimate plausible. The FCC is one of the more evil agencies around, and I am afraid that libertarians are less aware of the FCC’s evil than they are of that of the FDA, for example.

6. Since 2008, the number of startups has slowed from 600,000 per year to just over 400,000 per year. This leads me to wonder–has the success rate of startups gone up? If so, then the decline it startups may suggest an unfortunate increase in risk aversion. If not, then it could be a rational responses to an adverse environment.

7. Is there a causal relationship between cultural attitudes toward innovation and entrepreneurs, and which way does it run? It was suggested that support for innovation would go up if somebody discovered, say, a cure for cancer or Alzheimers’.

8. Is innovation dominated by a few really important creations, or by the cumulative effects of lots of incremental improvements? Your answer to that probably is correlated with our answer to (4).

9. One scenario for the future is that perhaps 30 percent of the population is intelligent and adaptive enough to contribute in the work place. The rest enjoy the “narcotics” of digital entertainment, recreational drugs, and so forth, while being supported by, well, I wasn’t the one who made this point, but if I had I would have used the term Vickys.

10. How much has IT contributed to productivity growth? There were optimists as well as pessimists. You know where I stand, given my article on Diane Coyle’s book on GDP.

11. Is there too much separation between value creation and value capture? It was suggested that finance captures too much value, and one effect of that is to draw people with STEM aptitude and skills away from science and engineering. I admit to being sympathetic to that view, although I think you want to try to fight the bias that sees finance as entirely parasitical. It really is important that capital flow to its most efficient uses, and if that means that we need smart people involved in financial markets, then so be it.

I think where finance goes wrong is in allowing people to capture value from inflated prices. So my Internet company gets sold in 1999 for more than what it was really worth (good for me, great for our main backers, not good for whoever ended up owning shares in the company that bought us). Or WhatsApp gets $19 billion today. But if the problem with Wall Street is a lack of wisdom, do you want to subtract talent from Wall Street? If so, which talent?

Another suggestion is that the “winners-take-most” nature of certain markets means that excess value gets captured. Think of Bill Gates in the heyday of Windows, or Google today. Maybe, although I would argue (and did) that, throwing consumers’s surplus into the mix, it’s not clear that the value captured by corporate winners is so excessive.

Velasquez-Manoff on Causal Density

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From An Epidemic of Absence.

The scientific method that had proven so useful in defeating infectious disease was, by definition, reductionist in its approach. Germ theory was predicated on certain microbes causing certain diseases. Scientists invariably tried to isolate one product, reproduce one result consistently in experiments, and then, based on this research, create one drug. But we’d evolved surrounded by almost incomprehensible microbial diversity, not just one, or even ten species. And the immune system had an array of inputs for communication with microbes. What if we required multiple stimuli acting on these sensors simultaneously? How would any of the purified substances mentioned above mimic that experience? “The reductionist approach is going to fail in this arena,” says Anthony Horner, who’d used a melange of microbes in his experiment. “There are just too many things we’re exposed to.”

In an essay over ten years ago, I wrote,

E.D. Hirsch, Jr., writes, “If just one factor such as class size is being analyzed, then its relative contribution to student outcomes (which might be co-dependent on many other real-world factors) may not be revealed by even the most careful analysis…And if a whole host of factors are simultaneously evaluated as in ‘whole-school reform,’ it is not just difficult but, despite the claims made for regression analysis, impossible to determine relative causality with confidence.”

In the essay, my own example of a complex process that is not amenable to reductionist scientific method is economic development and growth. In that essay, I also provide a little game, like the children’s game “mastermind,” to illustrate the difficulty of applying reductionism in a complex, nonlinear world. Try playing it (it shows up better in Internet Explorer than in Google Chrome).

The phrase “causal density” is, of course, from James Manzi and his book, Uncontrolled.

Bigger Houses, Smaller Households

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Mark J. Perry writes,

the median-size home has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,491 last year. In percentage terms, the average home size has increased by 61.4% since 1973, while the median home size increased by 63.3%.

Meanwhile, the average household size has been declining, from 3.01 persons per household on average in 1973 to a new record low of 2.54 persons per household last year, a reduction of almost one-half person per household over the last 40 years

We bought our house in 1980, and at the time I think it was a bit larger than median, but it’s clearly much smaller now.

Maybe Americans are over-housed?

Lots of Diane Coyle

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My review of GDP: An Affectionate History is here.

Overall, one arrives at a mixed verdict on GDP. On the one hand, it is the best way that we have to measure economic capability. On the other hand, because it fails to account for consumer surplus, GDP statistics lead us to take an overly pessimistic view of the economy. There is no Great Stagnation. There is only a widening gap between the rate of economic improvement and our ability to measure that improvement.

Tyler Cowen’s review is here:

Yet markets are developing new innovations whose benefits probably are undervalued by the GDP concept. This is the potential revision to GDP that commands the most attention from Coyle. For instance, consumers attach great value to Facebook, Google and Wikipedia, all of which are absolutely free to their users and do not enter directly into GDP calculations. I would go further yet, noting that the modern world also better matches plans and goals. Perhaps you can meet your ideal spouse on Match.com or at least pick up cheaper collectibles, better suited to your taste, on eBay. Who makes mistaken purchases of music these days, when you can hear a lot of the songs in advance online? Just about everything is reviewed online, which helps us spend with greater effectiveness. These gains are not well-represented by the older methods of calculating GDP.

The Phelps Contention

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A few nights ago, a number of us met over dinner to discuss Edmund Phelps’ book, Mass Flourishing. He contends that starting around 1970s, America’s commitment to modern values started to recede, and we began reverting to traditionalism. That in turn leads to reduced innovation and slower economic growth.

The reaction to this hypothesis from several Baby Boomers and younger discussants ranged from skeptical to apoplectic. Not modern? Us? Civil Rights! Women’s Equality! Four-letter Words! Gay Marriage! Smart phones!

Against those, here are some counterpoints, some of which Phelps has noted:

–decline in the propensity of young adults to move far from their parents (or even out of the house!)

–increase in NIMBYism (often masquerading as environmental concern), blocking development, for example, of airports.

–lower rate of new business formation

–stifling safety regulations (in nuclear power and in drug development)

–resistance to innovation in food production (GMOs)

–demonization of the 1 percent

–hostility to energy production and consumption

What Phelps means by modern values are individualism, self-reliance, and striving for individual excellence. By his standards, he would argue that those values are on the decline. This is a topic that is a bit squishy for economists to try to grasp, but I am not certain that Phelps is wrong.

By the way, I reviewed Phelps’ book here. He says that, contrary to my review, he is an anti-Schumpeterian. I am not sure what he means by that. In any case, he believes that innovation consists much more of small, everyday innovation than it does of dramatic examples such as the internal combustion engine. I tend to agree, and that is one reason that I have been unwilling to side with stagnationists who complain that we have not seen anything Really Big in the most recent two decades.

The Internet of Things

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Is it the Next Big Thing, or just a buzzword? Michael Mandel is one booster. Neil Gershenfeld and JP Vasseur are also optimistic. They write,

Countless futuristic “smart houses” have yet to generate much interest in living in them. But the Internet of Things succeeds to the extent that it is invisible. A refrigerator could communicate with a grocery store to reorder food, with a bathroom scale to monitor a diet, with a power utility to lower electricity consumption during peak demand, and with its manufacturer when maintenance is needed. Switches and lights in a house could adapt to how spaces are used and to the time of day. Thermostats with access to calendars, beds, and cars could plan heating and cooling based on the location of the house’s occupants. Utilities today provide power and plumbing; these new services would provide safety, comfort, and convenience.

These don’t sound like big deals to me. I could be wrong. I can imagine that if cities had a lot more sensors and id chips embedded along streets then self-driving cars might sooner become inexpensive and reliable. That would be a big deal.I can imagine that having software-defined radios in all sorts of places you could replace telecoms (some techies have been talking up that idea for 15 years or more). That would be a big deal.

James Pethokoukis talks with Erik Brynjolfsson and Andrew McAfee. Brynjolfsson says,

what matters is the value that we’re creating, not whether a particular metric moves – especially a metric like GDP, which often literally goes in the opposite direction of welfare. When things become free, that can often lead to a decrease in measured GDP, even though it leads to a big increase in welfare. Wikipedia is a perfect example of that. Or take the fact that most people now have, you know, a device that gives them turn-by-turn driving directions. It’s pretty much free with most smart phones. But a few years ago, people were paying hundreds of dollars for a GPS machine. So I think we have to be careful about overreliance on a metric that was never understood to be or shouldn’t be understood to be a welfare metric.

Their ideas for a big deal strike me as more ambitious. Brynjolffson says,

IBM’s Watson is not just a Jeopardy champion. It’s now going to med school. IBM has announced that they’re putting Watson technology up in the cloud; serve that down through the smart phones that are going to be available, as Erik says, to billions of people, honestly billions of people around the world within just a few more years. And you have the world’s best diagnostician available to the majority of the world’s human population. Again, if that’s not an impressive change for our societies, our lives, and our economies, then I’m out – I’m out of answers.

Diane Coyle on GDP and Consumer Surplus

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I just received a review copy of her new book. I’ve enjoyed her work in the past, and I am optimistic about this one.

Given my recent interest, I looked in the index for “consumer surplus.” There is one entry, which leads to a discussion of consumer surplus in the context of the Internet, where we know that there is a lot of free (non-material) stuff available.

My point is that even without the Internet, there is a lot of consumer surplus. Think about anesthetic for surgery, antibiotics for infections, indoor plumbing, heating and air conditioning, automobile driving, washing machines, electric lighting, and so on.

Signs of the Future

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From Technology Review.

Though genome editing with CRISPR is just a little over a year old, it is already reinventing genetic research. In particular, it gives scientists the ability to quickly and simultaneously make multiple genetic changes to a cell. Many human illnesses, including heart disease, diabetes, and assorted neurological conditions, are affected by numerous variants in both disease genes and normal genes. Teasing out this complexity with animal models has been a slow and tedious process. “For many questions in biology, we want to know how different genes interact, and for this we need to introduce mutations into multiple genes,” says Rudolf ­Jaenisch, a biologist at the Whitehead Institute in Cambridge Massachusetts. But, says ­Jaenisch, using conventional tools to create a mouse with a single mutation can take up to a year. If a scientist wants an animal with multiple mutations, the genetic changes must be made sequentially, and the timeline for one experiment can extend into years. In contrast, ­Jaenisch and his colleagues, including MIT researcher Feng Zhang (a 2013 member of our list of 35 innovators under 35), reported last spring that CRISPR had allowed them to create a strain of mice with multiple mutations in three weeks.

The IGM forum tried to ask economists to take sides in the end-of-innovation debate by asking if they agreed with

Future innovations worldwide will not be transformational enough to promote sustained per-capita economic growth rates in the U.S. and western Europe over the next century as high as those over the past 150 years.

The most popular answer was “uncertain,” and the next most popular answer was “disagree.” I would note that Tyler Cowen has consistently said that he is bullish on innovation longer term.