The Great Stagnation by Tyler Cowen

The central thesis of Cowen’s book is that the recent economic downturn is mostly due to the law of diminishing marginal returns.  The metaphor he uses to explain this is that of an orchard.  In any orchard, some of the hanging fruit is closer to the ground than other fruit.  The natural tendency is to first pick the low-hanging fruit, then move on to the fruit that is harder to reach.  In the same way, the natural tendency in any macro economy is to make easier, more obvious innovations before making more complex (and more expensive) innovations.  There is a kernel of truth to this, in that there are always diminishing marginal returns in any endeavor.
In particular, Cowen advances the argument that it is becoming more difficult to innovate, as evidenced by the decline in the patents per researcher rate.  This argument is problematic for two reasons.
First, not all inventions and innovations get patented (and some patent attempts are rejected).  There has been a rather slight, though appreciable decline in the patent per researcher rate of the last several decades, but there is no research indicating whether any of this is due to the effects of various open society movements.  These “open” movements are generally predicated on either the belief that ideas are free (in which case patents, copyrights, and other forms of intellectual property are null and void) or on the belief that ideas should be free (the open source movement is predicated on this).  Perhaps the movement away from patenting every last innovation might explain some, most, or all of the rate decline.
Second, there is no attempt to discern whether patent law itself is the cause of declining innovation and invention.  It is assumed, perhaps because this is the constitutional view, that patents encourage innovation.  However, patent law has often been used to bludgeon one’s competition from copying one’s ideas and business practices.  Jeff Bezos’ use of patent law to block other businesses from using one-click shopping is an example of the more extreme tendencies of patent law abuse.  The continual lawsuit wars between Apple, Google, and Microsoft are another.  In this case, innovations are being squelched because a) it is unprofitable to innovate if your profits simply go to your competitor and b) it is more lucrative to litigate than innovate.  When litigation is more profitable than innovation, it should not be surprising that people and firms prefer litigation to innovation.  Thus, it may be that the recent downturn in innovation is due not to diminishing returns but due to inept government market interference.
One bright spot in Cowen’s book is his critique of macroeconomic measuring tools.  In particular, his criticism of counting government costs at face value when determining GDP is well thought-out and intelligently argued.  The insight that government spending is likely subject to diminishing returns isn’t exactly brilliant, but the conclusion that perhaps government costs are inflating the real value of GDP output is quite useful.  His critique of educational spending is similarly insightful, in that he notes in brief that while educational spending has roughly doubled in inflation-adjusted terms, the output, measured in terms of educational testing and economic output, has not budged much.  He makes a similar case for health care as well. Ultimately, his conclusion is that our economy hasn’t really grown; it’s just that the numbers measuring it have been inflated.  Unfortunately, his analysis is not yet able to indicate how much inflation currently exists in economic growth estimates, but at least he’s pointed his fellow economists down the right path.
Cowen also spends some time considering innovation in the online sphere.  He notes that this is classic low-hanging fruit, to use his metaphor, but that this is not likely to lead to economic growth because of the net’s scalability.
One interesting point that he makes as evidence of the internet being low-hanging fruit is that there are a lot of amateurs driving innovation.  The widespread presence of amateurs, then, is a signal that there is plenty of room for innovation.
As an aside, there is one sector in the US economy that has a significant amateur presence, and that is the automotive sector.  The presence of amateurs, though, is relatively small, and confined primarily to the area of kit cars.  Kit cars are a sort of DIY car manufacturing project wherein one purchases a frame and body components from a manufacturer, plus whatever accessories one wishes to buy, then goes out and purchases a separate transmission and engine, and assembles the car oneself.  This is not a significant portion of the market, but there is a decent amount of innovation within this subset that is absent from the more general automotive production market.  Perhaps coincidentally, kit cars do not face as much regulation as production cars.  Likewise, the internet is, relative to other sectors, remarkably unregulated.  One possible conclusion to be drawn, which Cowen fails to do, is that perhaps the issue is not that we lack low-hanging fruit but that the government forbids us from picking it.
From there, Cowen observes that the growth of government size and scope is largely tied to technological growth.  This would suggest that government’s attempts to regulate, and thus hamper technological growth will ultimately hamper the growth of the state.
Cowen also dedicates a chapter to explaining the current economic crisis.  His explanation for the crisis is that “we thought we were richer than we were.”  This might seem glib at first, but it is correct.  Basically, all the investments that feel through did so because they were overvalued.  Banks overestimated the wealth and income of marginal lendees.  Investment groups overvalued stocks, bonds, funds, CDOs, and all sorts of other financial instruments.  Cowen does delve a little bit into pop psychology when explaining why we overvalued things.  He relies on an argument about human beings’ tendency to follow other people and rely on signals instead of direct sources.  He doesn’t spend much time discussing policies that gave the illusion of wealth, which would in turn lead to overconfidence.
The book concludes with Cowen asking what, if anything, can be done to fix the problem.  His policy prescription is this:  raise the status of scientists.  This strikes me as an incredibly foolish policy.  First, some scientists are likely to resist this.  Richard Dawkins and PZ Meyers come to mind.  Both have the social skills of an autistic eight-year-old, as evidenced by the fact that they routinely mock and denigrate the belief system held many people, even though the issue of the existence of God is well outside the scope of their respective scientific disciplines.  Basically, these scientists (and several others as well) are complete assholes that few people will ever come to like or respect.
That aside, there is a second concern.  Namely, that scientists in general are not trustworthy.  The relatively recent scandal at East Anglia suggests that there are some scientist who are more committed to ideology than scientific truth.  They can be trusted or respected, and it is unwise to give any form of power to these sort of charlatans.  (Of course, giving power to charlatans is the foundation of democracy anyway, amirite?)  Worse still, even when scientists are being sincere and honest in their research, most of it cannot be replicated and therefore cannot be trusted.  Does it make sense to give status to those who can’t be trusted even when they are sincere?
Furthermore, it was scientists that produced the atomic bomb.  Scientists were behind the technocratic drive of Nazi Germany.  Scientists supported the efforts of central planning in the USSR.  This is not to say that all scientists are evil.  It only to point out that scientists are human, just like everyone else and, as such, are prone to the same problems and imperfections of the rest of us.
Finally, it should be noted that pure science does not lead to as many contributions and innovations as engineering.  Perhaps Cowen conflates scientists and engineers (and that is certainly his right, though it would be helpful to clarify that).  Even so, the better solution would be to give higher status to engineers and other “hands-on” producers and workers that generate the bulk of day-to-day innovations.
In all, this book is generally a mixed bag of obvious truths, shortsighted analysis, and mildly brilliant insights which makes for an interesting, if uneven read.  It’s short and fun and thought-provoking, and seems at times that it’s designed to pick fights.

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