Stiglitz on Prizes

by on September 20, 2006 at 7:05 am in Economics | Permalink

Stiglitz has a short piece in the New Scientist coming out in favor of prizes.  There isn’t much to the article that you don’t already know and its actually more anti-patent than pro-prize still it’s an interesting sign that prizes are being taken seriously in top economic circles.

1 Tom Grey - Liberty Dad September 20, 2006 at 7:29 am

“Intellectual property” is supported because it supports innovation.
Very effectively.

A legal CD costs $10, the same quality Free Market (‘pirate’) CD costs $1.

The $9 difference is almost a “tax” on the buyer sent directly to the seller & publisher & distributor & producer & studio & … creator.

The gov’t does NOT get that cash, so in that sense it’s not a tax. (Though property which is copied is certainly not stolen — the original owner still owns it.)

IPR is Intellectual Monopoly Protection.

Before junking the use of legally justified violence against peaceful, poor, info-sharing folk, there needs to be some other ways of supporting the great benefit of innovation.

Prizes, even tax-supported prizes, seem a better way to support innovation than IPR.

Note how few IPR supporters do any cost-benefit analysis in support. The cost of IPR enforcement is increasing with every computer CD & DVD burner sold. If the enforcement cost isn’t already greater than the benefit, at some point it will be.

(Libertarians who think that violence should not be used to promote social goals, should not support legal violence to promote the goal of innovation; yet many/ most do. I no longer do.)

2 Brent September 20, 2006 at 11:14 am

I do not understand why the ideas of prizes and IP rights are thought of as mutually exclusive. IP rights incentivise business risks, and R&D projects with high costs are adopted because of the prospect of an IP protected high payout.

This system is obviously bad for high-cost R&D projects with high social impact but low commercial payout. More of these types of projects would be adopted with a good “prize† system in place.

3 Henry September 20, 2006 at 12:19 pm

Ah yes, Government Knows Best. Government knows what inventions humanity needs, and also knows exactly how much they’re worth. Somewhere Hayek is either laughing or crying. And color me really scared when libertarians and smart-government types start agreeing on something.

I wonder if anyone has the ability to go back in time 10, 20, 50 or 100 years and tell us which of the plethora of inventions were “good” ones, which ones could have been foreseen before they were invented, and which of them had values which could have been foreseen with even a rough degree of estimation, let alone accuracy.

How many of the inventions of the past were serendipidous, or became more successful than anticipated, or less successful, or filled product niches that we didn’t even know existed until they were invented?

BTW there are already “government prizes” in the form of research grants. The more results you get, the sounder your science, the more grants you get. It’s a nice idea to establish big prizes for big ideas — space travel, cancer cures, AIDS cures — but given the thousands upon thousands of life-improving ideas generated every year by the world’s population, it’s an unrealistic fantasy to claim the government should be in the business of regulating invention.

I also loved Stiglitz’s story about the Wright brothers getting into some snit and therefore delaying the development of the aircraft, concluding by saying the government had to intervene, implying that, of course, when it comes to inventions, Government Knows Best. It’s intellectually dishonest at best, as the same problem exists with prizes. Conflicts are still conflicts, unless Stiglitz is suggesting government needs to resolve prize disputes by saying, “because I said so.” Let’s hear the libertarians argue in favor of that one.

4 Mike Linksvayer September 20, 2006 at 2:36 pm

Bruce G Charlton:

The problem with prizes compared with patents, which Stiglitz doesnt address, is what happens after the prize. Patents provide an incentive to market and sell drugs (which is why pharmacetical corporations spend so much on sales and marketing), but a prize doesn’t.

Incentives to market and sell a drug once it has been created and tested are not a problem. If it were how do you explain generics itching to market and sell as soon as patent protection has lapsed, if not sooner?

5 Henry September 20, 2006 at 6:47 pm


Tho I say it with respect, you’re making a straw man. I said nothing about needing a government monopoly to produce anything. Your next statement however poses the question correctly: “Now the question is how to get the formulaes in the first place.”

When you say “prizes might well be vastly more economically efficient than cumbersome and corruption generating ‘intellectual property,'” you are making a guess.

I think a prize is nothing more than a government-controlled proxy for a patent monopoly. I think once a prize is reduced to a government-generated proxy for patent monopoly, all the same problems pertain to prizes as to monopolies, except that we also add the problem that the government can never know (a) what prizes are germaine, and (b) what values should be affixed to those prizes.

I can easily demonstrate the equivalence thus: A patent monopoly is the precise equivalent of a prize where every original idea is rewarded with the total amount of royalty income which would be generated by that idea for a certain period of time.

Thank you for the quote from Hayek, as it was enlightening and educational, but I see no connection whatsoever between that quote and a support for prizes. In fact his arguments could very well be used to argue against prizes. After all, a prize would also reward “anyone who hits upon a solution a moment before the next.”

I must also take exception to drawing any conclusions from “great works of literature” or “works of reference.” I am an internet programmer, and I am intimately familiar with the world of linux. In my opinion a great deal of open-source software is “chasing the tail-lights” of commercial software. Reference books are in a way doing the same thing. Wikipedia is useful because it is compiling information, not inventing it. The writer of a reference book is a copyist, not a creator. Wikipedia clarifies this point quite well when it enforces the requirement for full sourcing for every fact reported.

As to great works of literature, please forgive me but we are not all geniuses with uncontrollable creative impulses. Most inventions and copyrights are bestowed to working folks with a need to remunerate themselves. I could easily reformulate Hayek’s concern, saying I wonder whether the elimination of patents would lead to “wasteful concentration of research … where, in consequence of the law,” anyone who steals an idea quickly enough and places it into his existing production system, “before the next[,] gains the right to its exclusive use for a prolonged period.”

What I mean is this: We’ve all seen the cases of plagarism which occur from time to time, against famous authors. We’ve all heard Picasso say “good artists borrow, great artists steal.” Tell me whether you find it hard to believe that in a world without copyright, the Disneys and Stephen Kings of the world would not troll the world of uncopyrighted material in order to recast it and sell it through their pre-existing “sales channels.” Tell me who in this world would benefit more, the artist or the media conglomerate.

6 Laurent GUERBY September 22, 2006 at 5:10 am

An excellent article by Healthcare Economist on non-profit drug research and prizes :

7 Henry September 24, 2006 at 11:23 am


I cited Hayek because I think it’s foolish to believe government can do a better job of predicting the value of an invention than the private economy can. That is one of Hayek’s main contributions. Your citation of Hayek does not change this, and in fact, as I demonstrated, if Hayek argues against intellectual property monopolies, his words can also be said to argue against prizes.

I do not agree that prizes do not have the costs you stated. The costs are the same, and, given the inefficiencies of government, may in fact be more. You are creating a government agency to invent and administer prizes, and you would still have the same application process for a prize as for a patent. In fact you may have more costs for a prize in the sense that a patent is just an idea, whereas a prize is only given if the benefit can be visibly demonstrated. Patent costs are mostly research and application. Someone would still need to do the same amount of research and application work to make sure the ideas are eligible. Prizes are government-administered patents. Period.

I do not agree that patents are “plenty of government deciding,” at least not relative to giving prizes. The only thing the government is deciding in the case of a patent is a single number, which is the number of years the patent is valid. In the case of prizes, the government is deciding a great many more things, including — and nobody yet has responded to this — the value of the prize itself. Please remember the topic of this post, which is the contention that prizes are better than patents, which in my view is utterly absurd. On this issue, everything else is irrelevant except this simple question. I believe that patents are like spam prevention, in the sense that we may not like the system, but there’s no better one.

On the other hand, if patents are outlawed, lawyers’ costs will be replaced by security costs. Suddenly every corporation will need to have their own private armies with one guard posted in every cubicle. The costs of secrecy will mushroom.

Rad Geek:

Like Laurent you are responding to words out of context, to achieve rhetorical or semantic victory. The first comment you quoted was designed to nullify Hayek’s argument that patents are unecessary because great literature didn’t require them, which is an unfair and irrelevant observation. If you want to discuss patents in general, which I’m actually trying not to do, then you have to recognize that most patents are held by large corporations which employ many people, and in fact put money into those peoples’ pockets. Without going any further in this direction, all I’m trying to say is that putting or taking money from peoples’ pockets isn’t as easy an issue as you’re trying to make it.

The answer to your second question is extremely easy. Lifting patent protections means giving more benefit to those organizations which can sell commodities most effectively. Let’s say for sake of argument that those organizations are the members of the S&P 500 on the day patents are outlawed. You’ve just concentrated more power in those companies’ hands by telling them they can use the multi-billion-dollar salesforces to sell anything which anyone has created. The next Donald Trump or will be the organization that can sell anything from anywhere to anyone.

If you want to turn the US into a manfuacturing economy, then go ahead and outlaw patents. If your desire for principle is so great, then please don’t complain when you become a factory worker in a patent-less society where brains become less important than pure out-and-out execution.

8 Alec van Gelder September 27, 2006 at 5:45 am

For all the battles that can be fought, I find it amazing to see how much energy Libertarians devote to the discussion of intellectual property rights. There are legitimate concerns, esp related to the (systematic?) granting of dubious patents and the (arbitrary?) term extension of copyrights. But I am, rightfully so, not the one who prioritises any debate, and people should be free to write and devote as much time as they want to the issues they choose, etc.

The real issue here for me is AT (unjustifiably, in my opinion) honouring Stiglitz, stating that he resides in “top economic circles”. For someone who now makes a living selling his absurd books to undergraduates who don’t know any better, I think Stiglitz has lost any credibility that he once had, even as a Nobel winner. He was in Geneva around his time last year. Who was he hanging out with? Ralph Nader. That’s not a joke.

9 Sunil Bajpai September 28, 2006 at 2:51 am

Henry: “I wonder if anyone has the ability to go back in time 10, 20, 50 or 100 years and tell us which of the plethora of inventions were “good” ones, which ones could have been foreseen before they were invented, and which of them had values which could have been foreseen with even a rough degree of estimation, let alone accuracy.”

Very true. And that would be one reason why markets won’t support research whose future value is uncertain.

Grants and prizes can fix that to some extent, in addition to the advantages of equitable distribution of benefits to society.

Sometimes poorly regulated grants might not be so bad either. 🙂

10 Smarty June 22, 2008 at 11:26 am

For a grants-only system to work, you would have to trust the government to be:

honest, so that the grants programs aren’t gamed to their friends

Able to predict the future, and know what will be valuable

Intelligent, in order to see the far future

Efficient, to prevent even bigger bottleneck than what we have now

Rich, since apparently the US is going to pay for all new US inventions with a US taxpayer prize. Then the rest of the world gets to profit from the invention for free.

And Stiglitz is an economist???? Obviously the prize for economics is as corrupt as the prize for peace. If the Nobel prize system can be this bad, you think a US bureaucratic system would be better?

11 aion kina March 20, 2009 at 2:32 am

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