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The End of Stagnation and the Coming Innovation Boom

Monday, December 5, 2011

Economist Alex Tabarrok discusses bringing smart ideas to market, the college bubble, and why Paul Romer reminds him of Nobel Prize winner Ronald Coase.

Alex Tabarrok is the Bartley J. Madden Chair in Economics at the Mercatus Center and an associate professor of economics at George Mason University. He is also half of the dynamic blogging duo (along with Tyler Cowen) at the popular Tabarrok has published a new e-book, “Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast.” (Click here for Nook version and here for iTunes version). editor-in-chief Nick Schulz recently asked Tabarrok about the ideas in the book.

NICK SCHULZ: Your book calls for an innovation renaissance and promotes a series of policy changes—with respect to patents, education, immigration, and more—to trigger this renaissance. If the U.S. innovation system is stalled, are any countries getting innovation right today?

ALEX TABARROK: Let's take a look at just one aspect, infrastructure. China is very exciting right now: everywhere you go there are new buildings, new highways, new universities, modern airports, and lots of infrastructure spending, both public and private. Meanwhile, here in the United States we have an ancient power grid that repeatedly throws millions of people into the dark. It's quite depressing.

Our ancestors were bold and industrious, they built a significant part of our transportation and energy infrastructure more than half a century ago. It would be impossible to build that same infrastructure today. Could we build the Hoover Dam? We have the technology, of course, but do we have the will? In building infrastructure many interest groups can say no and nearly no one can say yes. We are beset by a swarm of veto players. Time, however, is running out. We cannot rely on the infrastructure of our past to travel to our future.

NS: You make a strong case that the patent system needs to be reformed, but you are not anti-intellectual property the way some critics of patents are. How should a policymaker think about the importance of patent policy and how policy should be reformed?

AT: The most important point is blindingly obvious yet ignored: not every innovation needs or deserves a 20-year patent. It's crazy that one-click shopping or reverse auctions are granted the same 20-year monopoly rights as a pharmaceutical that took 15 years and a billion dollars to research and develop. Thus, I advocate creating classes of patents of say 20, 7, and 3 years. Shorter patents would be approved more quickly and with less investigation.

We also have to remember that it's judges who have gotten us into the patent mess and judges who could get us out, even without major changes in legislation. The Sawyer and Man v. Edison case is absolutely fascinating in this regard, as I discuss in the book.

NS: You say we need more skilled immigrants. What argument can be made to critics of increased immigration that is most likely to prompt them to change their minds?

AT: We need to split the issue of high-skilled immigration from general immigration reform. If we do this, I think that there is room for a deal, because the economics are so compelling. Look, we spend six years educating a Chinese engineer; she earns her PhD at an American university. Now, is it better for the United States if that engineer stays in the United States or returns to China?

We used to think about high-skill immigration as a favor we did for the immigrant. Soon, however, we are going to offer that Chinese engineer a visa and we are going to be turned down. When the world's cream is no longer so eager to come to the United States, perhaps then we will start competing. But we should act now while the market for talent is still in our favor!

NS: You argue that the economic benefits of college are oversold. Assuming that is true, there’s a cultural hurdle to overcome: The BA has become a societal totem, something that defines and divides society along class lines. How do you convince folks—especially parents—that they can risk not sending a kid to college when they are told it is essential to an upper middle-class life?

AT: First, there is plenty of risk in sending a kid to college! Forty percent of students don't graduate within six years (and probably never will), many more graduate with degrees that won't help them much in the labor force, and even the ones that do graduate often do so with student debt that will follow them for decades. Moreover, even when college pays for kids is it paying for society? A lot of schooling is just signaling, not the true building of human capital. There is an argument for subsidizing science, technology, engineering, and math fields, but should we really be subsidizing anthropology, sociology, and English lit students?

In Germany, far fewer kids go to college than in the United States. Instead, most German high school students opt for apprenticeships and on-the-job training. These students are given high-skill, technical training that motivates theory with practice, and the students are paid! Moreover, on-the-job training promotes acculturation into the adult world instead of walling off 16- to 18-year-olds in their own, sometimes dangerous, world.

By the way, when I make these arguments I am sometimes accused of not appreciating that college education makes for a "well-rounded" person. What a load of rot. Basically, these critics define well-rounded as someone who can quote Plato! Rather self-serving. Well-rounded should also mean being able to replace a light fixture, a challenge to many Platonists! More seriously, take a look at students in Finland, Sweden, or Germany. In these countries, more than half the students enter apprenticeship programs instead of going to college, but these students are very well-educated and well-rounded.

NS: What thinkers have most influenced your views on innovation and growth and why?

AT: I would mention Michael Heller, Mancur Olson, Paul Romer, and my colleagues at George Mason. Michael Heller's The Gridlock Economy is a brilliant book and a great read. Heller coined the term the tragedy of the anticommons. The better-known tragedy of the commons is the tendency for an unowned and hence nonexcludable resource to be overused. The tragedy of the anticommons is the tendency for a resource with many owners, each of whom can exclude the others, to be underused. I draw on Heller's work to talk about patents. Basically, it's hard to get an agreement to innovate when a product builds on four patents and each owner wants 30 percent of the profits. It's almost impossible to innovate when a product builds on 100 patents and each owner wants 10 percent of the profits.

Mancur Olson's The Rise and Decline of Nations is another classic. Olson shows how interests groups accrete over time, slowing down decision-making, gumming up the works, and stalling innovation. Jonathan Rauch wrote an applied version of Olson's book that I always like to quote for the illustrative title, Demosclerosis: The Silent Killer of American Government. Olson died young, but had he lived he could well have won the Nobel. Mancur Olson's work grows more relevant every day.

We have talked a lot about what impedes innovation, but in Launching I also talk about some factors that are increasing innovation, and here Paul Romer has been a big influence. Romer is best known for several breakthrough papers in the theory of economic growth. I draw not so much on the technique of those papers but a few of Romer's ideas about ideas, most importantly that ideas are sunk costs—perhaps best expressed by the saying that the first pill costs a billion dollars and the second pill costs 50 cents. It's a simple point but one with deep implications for economic growth, world trade, research and development, and even things like foreign policy. I talk a lot about these ideas in my TED talk and they also make a brief appearance in the book. Romer reminds me a lot of Coase—a handful of publications, seemingly simple ideas, deep and profound implications.

Finally, I am very fortunate to have colleagues at George Mason with whom I discuss ideas every day—Tyler Cowen, Bryan Caplan, Garrett Jones, and Robin Hanson are notable influences.

Nick Schulz is editor-in-chief of The American and the DeWitt Wallace Fellow at the American Enterprise Institute.

FURTHER READING: Schulz also writes “Mitch Daniels Goes to School,” “It’s Mother’s Day; Be Selfish,” “How the Progressives Almost Killed Football,” “Three Inconvenient Truths for Occupy Wall Street,” “What's Behind the Obama Administration's Assault on Private Investment?” and “The Four Players Driving Innovation.”

Image by Rob Green | Bergman Group

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