Ricardian thought in progress

by on October 15, 2010 at 7:35 am in Economics | Permalink

In Ricardo's basic model there are diminishing rather than linear returns.  Surplus accrues to the fixed factor, which is land.  Labor earns some version of subsistence and the going rate of profit is piled on top of that.  The productive difference between a piece of land, and the least valuable piece of land, accrues to each specific landlord as rent.

What if ideas rather than land are the fixed factor?  Wages and profits stagnate.  Some "idea landlords" receive enormous pecuniary returns, while others do not.  The rate of invention is slowing down and indeed "patents per researcher" has been falling for a long time.

Which features of our evolving income distribution does that scenario not fit?

Addendum: Arnold Kling comments.

Steve Fritzinger October 15, 2010 at 4:07 am

This might account for the income distribution in idea based industries, like software, and possibly in "creative" industries like film and music.

But it misses large sectors, like mineral extraction, defense contracting and any sector where significant rents can be had. It also misses the winner-takes-all realms of pop and sports superstars.

On the whole, I don't know if the idea based sectors are big enough (or highly leveraged enough) to dominate the total economy.

John October 15, 2010 at 4:33 am

When I was in graduate school we used to joke that if our experimental research were easy someone would have done it already. I think there's some truth to that.

I think that within a given field invention only becomes harder with time because the easy stuff /is/ done first. The only way to make invention easier is to create a new field, which requires a mix of new knowledge and the right exsting technologies to combine. But just like innovation, the easy physics and chemistry has already been done, too, so creating a new field is hard.

Finch October 15, 2010 at 5:25 am

I would expect patents-per-researcher to go down as the fraction of researchers working in fast moving fields like software engineering increases. It's rarely worth patenting software because the useful lifetime of inventions is so low that trade secrets are more cost-effective. So stuff while like RSA gets patented, but the thousand clever hacks the Edisons of software create never do.

DanC October 15, 2010 at 6:45 am

Perhaps major technology breakthroughs have a random element. They can occur in spurts just because not all paths lead to success. Then the ideas are mined for other uses, popularized, and become common.

Perhaps today we are better at quickly exploiting a new "idea" and spreading the application to new areas quicker then ever before We just don't have that many great ideas all the time.

In terms of income distribution, it is harder for the "idea" to be protected before others have exploited unanticipated applications of the idea.

The general population may see an increase in their living standards from the creation of new products or services, but they are also faced with rapid changes in the way they make a living. People who can quickly adjust to the new "idea" can ride the wave, while others may get stuck in the muck. Education or superior access to capital markets may decide their fate.

Michael F. Martin October 15, 2010 at 8:27 am

I wish I could find the statistics that I saw a little while ago showing how the rate of joint inventorship has increased — i.e., that the number of patents per person has decreased because more and more patents result from collaborations.

It's probably not that the rate of invention is slowing down, it's that the appropriation of rents from inventorship alone — i.e., R&D independent of early product development and marketing — has gotten much harder. Instead of filing patents, some faculty simply help found startups and sit as advisors.

Lord October 15, 2010 at 10:00 am

It is difficult to distinguish changes in invention variability from changes in invention rates, chunkiness from trends.

DanC October 16, 2010 at 4:12 am

Bill again confuses issues.

The rents go to people you can create marketable applications of "ideas". Especially in America, the rents go to the entrepreneur and innovators. That system works pretty well.

Financial innovations occurred, along with an understanding of how to transfer risks, which lead to massive incomes for some. Government policies encouraged the risk taking by incentivizing a shadow market and directly encouraging high-risk behavior. Government desire to redistribute wealth lead to incentives to redistribute risk in order to get compliance with government policies.

Capital gains are the returns I earn from giving up consumption today and taking a risk to consume more tomorrow. Taxing capital gains is a tax to limit the future growth of the private sector while funding government expenditures today. It punishes the thrifty and rewards the spendthrift.

How hedge fund managers are taxed is a legitimate debate, unless you are seeking to use the tax code to punish people you don't like.

DanC October 16, 2010 at 6:05 am

Bill, Bill, Bill

If you prefer to make investing internationally subject to special taxes please prepare for trade wars in return. And those international firms are private concerns, that interact with American companies, to supply the world with products and services. Your very narrow, blind, view of the world is a bit shocking. If an American chooses to save some of her income in the form of foreign assets they are making America weaker and should be punished with high taxes? What? I suppose you also want special taxes on American companies that invest in operations overseas?

If people have their income based on the growth of their company, why is that bad? A poor slob making minimum wage is paying zero federal taxes. Why impose extra taxes on the working stiff who saves for retirement. You taxed him when he earned it and you taxed it again when he saved it. You are punishing people for saving and investing and you justify it with some class warfare nonsense. Insane.

Henry Ford did not invent the combustion engine, but he became wealthy using the technology to meet market needs. You have a problem with that? You think Ford cheated or something?

And our tax structure and regulations are often about reallocating resources to what government desires. Read B Franks comments on Freddie and Fannie before and after the financial crisis.

DanC October 16, 2010 at 6:33 pm

Junk and more Junk.

Many economist have looked at income inequality and Kevin Murphy has written on the topic. Government intervention to "correct" the problem? Bigger government, more government programs, higher taxes and pretty soon we are all rich? Silly
http://www.american.com/archive/2007/may-june-mag

The poor pay no Federal income taxes. They get more then 100% return on their investments on social security and Medicare. While the poor pay into these "social insurance" programs they get a rate of return on their investment that is much better then anything the private sector can deliver. It is really a negative tax, for every dollar the poor but into these social programs they get ten dollars back in benefits.

Society is so cruel.

Please, these two articles are really a waste of time.

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