Rajdeep Sardesai on the problems of law and order in Bombay. Nothing is more important in the priorities of the State than the police and the courts.
In recent weeks, we’re seeing fresh attention on the flaws of the HR processes of government. Shashi Tharoor in the Indian Express on the IFS, and Sundeep Khanna in Mint.
Trampling on the individual in India:
- Sending cartoonist Aseem Trivedi to jail is ridiculous.
- Vijaita Singh in the Indian Express about the government interfering in grants to think tanks, followed by an editorial on this.
- As Robert Kaplan says, underdevelopment is where the police are more dangerous than the criminals. Here’s a story about the police in Gurgaon.
- Meghan Davidson Ladly writes in the New York Times about the struggle for freedom that many women in Pakistan are facing. We can’t say we’re finished with this. What fraction of India faces this level of social backwardness?
N. Sundaresha Subramanian has a great first draft of history, telling the story of Sahara in the Business Standard. This is a great vindication for K. M. Abraham and C. B. Bhave, and a reminder of the importance of the recruitment process in government. Also see great reportage on Firstpost : Sahara will have to sell realty assets to pay off investors by Raman Kirpal; ROC: The dog that did not bark when Sahara came in by R. Jagannathan.
I recently blogged about checks and balances that will keep Indian capitalism safe. I guess I am picking up ideas from the zeitgeist. On related themes, see: The old India is dead. Wake up, netas and business babus by R. Jagannathan on Firstpost; A long way from 1984 by Pratap Bhanu Mehta in the Indian Express and an editorial Behind the curve in the Business Standard.
Many people in India like to invest in gold and in real estate. I would like to remind them that the analytical case for these is weak. Here is some new evidence on gold, and here are some older arguments about real estate.
Sunil S. in Pragati magazine about India’s electricity grid problem.
Mobis Philipose in the Mint writes about an intruiging development: a `Intermediaries and Investor Welfare Association (India)’ has filed a petition in the Delhi High Court alleging that algorithmic trading is bad. I wonder who is behind this.
On the theme of the transformative impact of google maps, see How Google Builds Its Maps, and What It Means for the Future of Everything by Alexis C. Madrigal.
Sebastian Mallaby has a great response (originally in the Financial Times) to the Apple-Samsung patent violation case. If you’re in the US, you need to run, not walk to buy cool Samsung equipment, or buy it when you travel abroad.
The Euro crisis is back from vacation by Adam Davidson, in the New York Times magazine.
If Xerox PARC invented the PC, Google invented the Internet by Cade Metz in Wired magazine.
Why sex could be history by Kira Cochrane in the Guardian, about a new book by Aarathi Prasad.
Some of the biology that we learned in high school is getting overturned.
A U.S. judge yesterday threw aside a much-anticipated trial between Apple and Google-owned Motorola Mobility over smartphone patents. The decision and a blog comment by the same judge could prove to be a watershed moment for a U.S. patent system that has spiraled out of control.
In his remarkable ruling, U.S. Circuit Judge Richard Posner stated that there was no point in holding a trial because it was apparent that neither side could show they had been harmed by the other’s patent infringement. He said he was inclined to dismiss the case with prejudice — meaning the parties can’t come back to fight over the same patents — and that he would enter a more formal opinion confirming this next week.
While I, of course, oppose the legal concept of patents—and intellectual property in general—I do applaud this ruling as a step in the right direction in terms of both the legal theory underlying it and the more practical ramifications of reducing the scope of IP. Since Judge Posner is asserting that neither party had harmed the other, he is basically saying that there are limits to patent law. Since this is basically a matter of personal opinion rather than longstanding legal tradition (court have often stretched the limits of patent law rather than limit them), Posner’s decision will likely get some coverage, and hopefully cause people to think more carefully about the whole concept of IP.
Better yet, though, Posner’s decision is in keeping with the spirit of the constitution. The rationale for patent law in the constitution is that it will promote the progress of the arts and sciences. This is a utilitarian argument, not a moral argument. There is no evidence that the founding fathers—or the politicians that adopted the constitution, for that matter—viewed ideas as a form of property, subject to some sort of property laws. Rather, the idea was that by giving artists and inventors limited monopolies, they would be more encouraged to produce new works, ideas, and innovations. Thus, the main purpose of patent law is to encourage the spread of ideas. It is not intended to cause pointless fights between mega-corporations. Posner’s ruling is thus encouraging because it reinforces the utilitarian view espoused in the constitution. The entire purpose of IP laws is to make society wealthier. Mega-corporations paying lawyers to ship boxes of paper to one another does not enrich society.
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.
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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.
For most of my life, I ignored/accepted it, but since I’ve become interested, every argument — moral or practical — that I’ve seen for “intellectual property” has collapsed under even nominal scrutiny. IP doesn’t protect anything resembling justifiable claims to property rights, nor does it, as its supporters love to claim, “spur innovation.”
At least not usually … but I think I may have found the exception on the latter count.
The patent in question, granted to Sony last November, would seem to put Sony in the position of being able to demand that anyone wanting to put a TV/radio style commercial — i.e. one that actually interrupts play for “a word from our sponsor” — into a video game to get Sony’s permission (presumably pursuant to an exchange of filthy lucre).
Setting aside the complete silliness of the patent claim itself (the “invention” they’re trying to claim “ownership” of has been around for as long as media, whether it’s a full-page ad in the middle of a magazine article, a reading of a list of sponsors between acts of a play, etc.), I can actually see it “spurring innovation.”
To wit: If Sony goes all patent troll with this idiocy, trying to extort money from other game companies for the “privilege” of interrupting their games with commercials, those other game companies will probably come up with different, less intrusive ways to monetize their content through advertising.
I doubt that’s the outcome Sony has in mind (and it’s even possible that the patent is just “protective,” to let them do their thing without fear of getting sued by some other troll), but it’s one I can live with.
We investigate women’s underrepresentation among holders of commercialized patents: only 5.5% of holders of such patents are female. Using the National Survey of College Graduates 2003, we find only 7% of the gap is accounted for by women’s lower probability of holding any science or engineering degree, because women with such a degree are scarcely more likely to patent than women without. Differences among those without a science or engineering degree account for 15%, while 78% is accounted for by differences among those with a science or engineering degree. For the latter group, we find that women’s underrepresentation in engineering and in jobs involving development and design explain much of the gap; closing it would increase U.S. GDP per capita by 2.7%. [Emphasis added.]
The concluding assertion is obviously false. This is simply because patents are not distributed randomly. The system is opt-in, which introduces self-selection bias (which may possibly be particularly influential at the corporate level), and patents have to be approved.
The latter qualification is especially important, because inventing new things and creating meaningful innovations generally requires a high degree of intelligence and knowledge. Since men have the flatter distribution curve when it comes to intelligence, it stands to reason that men should naturally receive more patents because they have more of the elite intelligence that generally correlates with invention and innovation.
Incidentally, this also renders the conclusion void as well, since it is predicated on the assumption that patents are essentially distributed randomly. Since they are not, and since women are not in a position to perform equally in regards to innovation, it is illogical to assert that closing the engineering and R&D gap will solve the patent inequality problem, and correspondingly increase GDP.
We cannot permit America to be the “pay line” for every worldwide drug and device development program. The same pill sold here in America for $25 is $2 in Canada and other nations. The cost of reproduction is covered by the $2, but development is not. The free market would normally prohibit this activity since people would simply buy the drug in Canada and re-import it here, but the drug and device makers lobbied Congress to make that illegal.
A good portion of these sort of inefficiencies could be eliminated simply by removing patent protection for drugs. If the US eliminated the patent system, drug companies wouldn’t be able to prevent competitors from selling identical drugs on the cheap (although competitors would not be able to recreate any placebo effects that occur with brand names).
Of course, this action is opposed because it would lead to less drug research, particularly in the treatment of rare diseases. But, were this the case, the market would work as effectively as it should. One of the problems the US faces in regards to medical care is that everyone wants a drug to solve their medical issues. Between patent law, health insurance mandates, and anti-competition laws, the US government has managed to effectively subsidize research for diseases that would not ordinarily merit research.
One effect of this effective subsidy has been the increase in unhealthy behaviors. Since people are implicitly promised health care and medicine no matter what, it would be reasonable to expect people to take more health risks. And, given the current obesity epidemic, it seems that this is certainly the case. As such, removing the effective subsidy of drug research would help to encourage people to live healthier because drug companies would be much less inclined to research drugs that cure rare or complex diseases. Thus, by removing subsidies, health becomes cheaper.
Tabarrok focuses on four policy areas in which changes could yield very positive results. He kicks off the short eBook by focusing first on patent reform, noting that many areas of patent coverage (software, technical processes e.g.) have low innovation costs and, as such, are not worthy of patent protection. In fact, his recommended patent reform is basically total abolition of all patents, save for medicine and a handful of other fields. This seems rather viable given that most inventions and innovations are generally cheap and likely inevitable. He also has a few short steps that would help as well, like requiring a functioning prototype and capping terms to seven or fourteen years depending on category.
He next turns his sights on to a prize system for innovation. His proposed policies are well-intentioned but naïve. He proposes that the government fund sizeable prizes (to the tune of millions or billions of dollars per prize) with specific goals—not methods—in mind. This should work in theory, but the fundamental problem with this method is that it fails to discern how the government would go about setting the most economic goals and prizes. This process could become highly politicized, as anything involving billions of federal dollars tends to. However, venture capitalists and innovation firms should take note of this recommendation and implement it.
Tabarrok closes his short book by looking briefly at education—both public and post-secondary. Regarding the former, he recommends reform. Why this is preferable to privatization is unstated, but perhaps that is beyond the scope of the book. One curious thing about is argument is how he claims that there is a correlation between high school graduation rates and GDP growth. While statistical analysis bears this out, it is worth noting that there is no proven causal relationship between the two. It could be that GDP growth causes increases in the rate of High School graduation as families become wealthier, and better able to secure leisure time for their children, thus reducing teenagers’ need to work.
It is worth pointing out, though, that public education in the US is crap, and is entirely too test-driven, thanks in large part to No Child Left Behind.
Tabarrok doesn’t dwell much on this, which seems to be a bit of an oversight.Finally, Tabarrok turns his sights on to college education, noting that there is undoubtedly a college bubble and that there should thus be fewer college students.
Government reform is recommended, since that is a source of the current malinvestment.
Better education as to the benefits of a post-secondary education is also recommended, though this seems largely fruitless.
In all, this short book is a rather thought-provoking read. Readers are not likely to agree with all the answers, but the questions are worth mulling over. In fact, the questions the book asks make it worth the purchase. There is a lot to consider and debate, thanks to this book, and the answers Tabarrok provides are considerably less hackneyed than what has been heretofore seen. As such, the book is a recommended read.
The pharmaceutical giant, Pfizer, watched its main source of revenue and profits, Lipitor, lose its patent protection this week, and now faces competition from generic equivalents. In 2010 Lipitor was the second highest selling prescription drug with $5.2 billion in sales in the U.S. alone. (source: Drugs.com). Now, in the next year, prices of the generic drug, Atorvastatin, should drop dramatically. The Lipitor saga gives us an opportunity to see market forces in action, but it also points out the problems when insurance coverage is involved.
Like most first world countries, the United States uses the patent system to encourage research and development. If a pharmaceutical company can develop a new drug, they can maintain a government approved monopoly on the sale of that drug for up to 17 years. Monopolies drive higher prices, which helps the inventor, Pfizer in this case, recoup their research costs, and return a handsome income to their shareholders. Once the patent runs out, other manufacturers can apply to produce the drug. This increased competition then quickly drives down prices. So far, this is a classic example of market forces at work.
Pfizer has been planning for this day for a number of years, and with annual sales figures like those in 2010, this is vital to the company’s fortunes. The company has triggered a number of legal and regulatory efforts to delay the arrival of generic equivalents. For a compilation of news articles on Lipitor, see this page in The New York Times.
Two particular strategies twist prescription drug coverage in favor of the brand name. Many prescription drug plans have incentives to encourage patients and their physicians to use generic drugs. Often this is done with a lower co-payment on the part of the patient. The lower co-payment provides an incentive for the patient to accept a generic equivalent, and the insurance plan saves money by paying the lower, generic price. Pfizer (and other drug companies facing similar out-of-patent challenges) is trying to subvert this incentive. Here’s a hypothetical example.
These figures are illustrative – made up – but make the point.
Typical Brand vs. Generic Comparison for a Drug Plan
Brand: Patient Copay: $30 – Total Cost of Drug: $200 – Insurance Pays: $170
Generic: Patient Copay: $10 – Total Cost of Drug: $50 – Insurance Pays: $40
Now Pharmaceutical Company Offers a Copay Discount
(Pfizer discounts its price of the brand drug to cover reduced copay)
Discount Brand: Patient Copay: $8 – Total Cost of Drug: $178 – Insurance Pays $170
With this discount arrangement the patient is happy, the drug store doesn’t lose any money, but the insurance company still pays the larger cost. This puts upward pressure on insurance premiums.
Another strategy – Pfizer offers a significant discount on the price of brand name Lipitor to pharmacy chains as long as they agree to not provide generic equivalents. The chains save money, and can pass some of that on to patients, but the insurance plans that pay for the drugs don’t enjoy any savings.
Is this legal? The second, discounting strategy with pharmacies, smells a lot like restraint of trade/anti-trust concerns to me. The earlier example, offering a discount on copays, seems legal. Are either of these good social policies? Not a chance.
These creative approaches illustrate one of the problems that insurance introduces into a market. In healthcare, patients have enough discretion that they can alter their buying behavior, based on prices they face. Yet the patients don’t see or feel the full price of their purchase decision. In a regular market the patient balances the benefit of the purchase against the price, and makes a good decision on allocating resources. That good decision helps society. With insurance the patient sees only a small fraction of the total price, and may make a decision that is not socially optimal. This breakdown in market forces is one of the challenges our healthcare reform goals face. Ideally we would like patients to be full partners in the decisions made about their care. Insurance blunts that participation.
President Obama today signed into law the Leahy-Smith America Invents Act (H.R. 1249) a bipartisan, bicameral bill that updates our patent system to encourage innovation, job creation and economic growth. Both Houses of Congress overwhelmingly supported the proposal, which was sponsored by House Judiciary Committee Chairman Lamar Smith (R-Texas). The House of Representatives passed H.R. 1249 by a vote of 304-117 earlier this year. The Senate passed the bill by a vote of 89-9. Senator Patrick Leahy (D-Vermont) partnered with Chairman Smith on the legislation. Congressman Smith led the House efforts on patent reform for more than six years.
Much-needed reforms to our patent system are long overdue. The last major patent reform was nearly 60 years ago. The House patent reform bill implements a first-inventor-to-file standard for patent approval, creates a post-grant review system to weed out bad patents, and helps the Patent and Trademark Office (PTO) address the backlog of patent applications. This bill is supported by local companies as well as many national organizations and businesses.
I’m not sure what to think of this.
On the one hand, this streamlines the patent system, which I begrudgingly support.
The first-to-file standard makes resolving multiple claims dead simple:
Who got to the patent office first.
And weeding out bad patents is also good, especially in light of the standards (distinct, non-obvious, etc.).However, this legislation could very well increase the occurrences of patent-trolling. This would actually discourage invention and innovation in the long run because inventors would more than likely seek to avoid paying royalties to produce their own inventions, so they would have to create modifications to their own product in order to sell them. I imagine this effect would be more prominent among large corporations than among individual inventors because corporations tend to be more susceptible to industrial/commercial espionage.
At the end of the day, though, the simplest and most effective reform is to simply abolish the patent system altogether.There’s little evidence that the costs of the patent system outweigh the benefits thereof.