The new Chetty, et.al. paper on innovation and inventors

by on December 3, 2017 at 9:51 pm in Data Source, Economics, Education, Science, The Arts | Permalink

The authors are Alex Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen, here is the abstract:

We characterize the factors that determine who becomes an inventor in America by using deidentified data on 1.2 million inventors from patent records linked to tax records. We establish three sets of results. First, children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. There are similarly large gaps by race and gender. Differences in innate ability, as measured by test scores in early childhood, explain relatively little of these gaps. Second, exposure to innovation during childhood has significant causal effects on children’s propensities to become inventors. Growing up in a neighborhood or family with a high innovation rate in a specific technology class leads to a higher probability of patenting in exactly the same technology class. These exposure effects are gender-specific: girls are more likely to become inventors in a particular technology class if they grow up in an area with more female inventors in that technology class. Third, the financial returns to inventions are extremely skewed and highly correlated with their scientific impact, as measured by citations. Consistent with the importance of exposure effects and contrary to standard models of career selection, women and disadvantaged youth are as under-represented among high-impact inventors as they are among inventors as a whole. We develop a simple model of inventors’ careers that matches these empirical results. The model implies that increasing exposure to innovation in childhood may have larger impacts on innovation than increasing the financial incentives to innovate, for instance by cutting tax rates. In particular, there are many “lost Einsteins” – individuals who would have had highly impactful inventions had they been exposed to innovation.

Here is the paper, here are the slides (best place to start), here is a David Leonhardt column on it.

Florence!  Motown!  Kuna molas!  David Hume knew this!  The work looks very interesting, though I doubt if the main effect is actually channeled through absolute income, as evidenced by the immediately afore-mentioned examples.  Also, I don’t think their tax analysis quite holds up once you see intermediaries as needing to cover fixed costs for the innovators.  Taxing profits from innovation then lowers the number of potential innovators quite a bit, by discouraging investment from the intermediaries.

1 Steve Sailer December 3, 2017 at 10:28 pm

Chetty’s map of where patent inventors lived is straight out of Neal Stephenson’s theory that northern college towns heavily populated by people of Yankee/Puritan descent are central to American technology.

E.g., Robert Noyce, “The Mayor of Silicon Valley,” was the son of the Congregationalist chaplain at Grinnell College in Iowa (as Tom Wolfe pointed out in 1983).

Reply

2 Connie Lingus December 4, 2017 at 12:41 am

I know. Let’s use the tax code to punish them!

Reply

3 Mulp December 4, 2017 at 11:13 am

Invention requires paying workers. If it didn’t, poor people would invent at the same rate. Paying workers is the biggest tax dodge. Thus business profit taxes punishes not paying workers, promoting innovation.

Bezos runs Amazon so it has no profits by paying so many workers to invent new ways to grow.

Nothing in the GOP tax bill will cut Amazon’s tax bill.

On the other hand, the GOP is definitely trying to kill the invention and hiring driven by Elon Musk which is creating lots of job creation. High profit businesses are being forced to pay more workers to invent, cutting their profits that the GOP is rewarding with lower tax rates.

Invention and innovation were higher when tax rates were higher at 50% plus in high capital industries. Cutting corporate taxes has coincided with the US invention in capital intensive industry falling from leadership.

Because of the high reward for not investing when tax rates are low, spurring invention has been done with refundable tax credits by government picking the winners. High taxes on economic profits reward invention and investing in new productive capital.

The GOP is rewarding firing workers and blocking competition with low tax rates on monopoly profits and rents.

Reply

4 Falstaff December 6, 2017 at 12:15 am

What colour is the sky in your world?

Reply

5 Steve Sailer December 6, 2017 at 5:22 pm

Here’s my analysis of Chetty’s new study on the backgrounds of inventors:

http://takimag.com/article/lost_edisons_steve_sailer/print#axzz50O88CZZy

Reply

6 Chip December 3, 2017 at 10:50 pm

One oddity.

In the section dealing with patent rates by city, there are no cities from the South in the top 10.

But for female patent rates by city, 6 out of 10 cities are in the South.

Reply

7 mkt42 December 4, 2017 at 3:21 am

Interesting indeed. I’m still mystified as to why so many of the strongest women’s college basketball programs are in the south rather than the NE or West (yeah there’s UConn and Stanford, but take away them and the NCAA tournament finalists have been South Carolina, Mississippi St, Louisville, Tennessee, Texas A&M, Baylor, etc. with a few appearances by Notre Dame and Syracuse).

Gender roles in the South seem not to fit the common stereotype, in some activities at least.

Reply

8 mkt42 December 4, 2017 at 3:32 am

In contrast, slide 55 shows the “Gender Stereotype Adherence Index” and the states that are high in gender stereotyping are pretty much the ones that one would expect, except for NJ being 7th highest (the top 6 are UT, OK, ID, WY, MS, and NV).

Reply

9 Steve Sailer December 4, 2017 at 6:57 am

Presumably the reason that the % of inventors who are female is high in South Carolina is because there aren’t many male inventors.

Similarly, Modesto, CA in the Central Valley has, by far, the highest % of inventors who are female, but that’s presumably because technically adept males head for the San Francisco Bay. E.g., George Lucas grew up in Modesto (“American Graffiti”) but spent most of his adult years in Marin County north of the Golden Gate Bridge.

Reply

10 Jeff R December 3, 2017 at 11:25 pm

Even if their conclusion about increasing childhood exposure was correct, it’s got some very real practical limitations. Only so many people can live next door to Elon Musk.

Reply

11 Daws December 4, 2017 at 9:39 am

Agreed but that’s why my social-engineering bone is so tickled

Reply

12 Mulp December 4, 2017 at 6:51 pm

If his neighborhood was rezoned from single family to high density subsidized housing development zone and eminent domain was granted to take all lots within 1000ft of his home, 50,000 poor kids could grow up near Elon’s kids…..

Reply

13 Bernard Guerrero December 5, 2017 at 4:46 pm

Likely resulting in two more losers in the world. “Exposure” is not a non-rival good, unless a mere glimpse suffices. Spread the kids out!

Reply

14 Dots December 6, 2017 at 6:35 am

Elon himself grew up in S. Africa, of all places

Reply

15 Demosthenes December 4, 2017 at 12:08 am

Chetty et al? The Matthew Effect at work.

Reply

16 ChrisA December 4, 2017 at 12:15 am

In regard to the missing Einsteins, I have a bunch of patents and I am certainly no Einstein. My patents are entirely due to the field that I entered, it takes a great deal of hard work studying to become proficient, plus it also requires lot of investment (from my employers) and thus I had few competitors looking for the innovations, It’s like being the first person to enter a remote rock climbing valley, all the easy climbs in the valley will be yours to claim even if you are not a genius climber. I suspect this is the normal way patents are created, i.e. the model Chetty etc have of a lone genius working away in a garage is not really representative of most patent holders. So you won’t really increase the number of patents by increasing the exposure of lower income children to innovators, it could well be a zero sum game, it is more about the number of patent creating jobs, which is probably a function of societies willingness to fund such jobs, which comes back to the payoff investors can get.

Also, doesn’t the raw result graph of 3rd grade reading scores validate the approach that if you are good at 3rd grade reading you are likely to have many patents? Sure via lots of statistical methodologies you can show there are some folks lower down in the reading scores who could do better, but the raw result shows at a gross level the system seems fair.

Reply

17 Al December 4, 2017 at 1:20 am

I also have a good number. I think you are downplaying the ‘difficulty’ in getting patents. One, generally, (at least in my experience) has to get into a decent firm and then needs to be one of the ‘top’ people in the firms eng/research divisions to get the work that leads to patents. This is passing two, perhaps three, quite difficult filters: (1) get a technical degree, preferably from a good university (if you don’t get a degree or get a degree from a poor school then the following filters are harder), (2) get into a ‘decent’ firm, all decent firms have hiring practices which turn down most candidates, and (3) out compete the people who passed (1) & (2), not simple given that they are sufficiently talented to pass those filters!

Reply

18 Krzys December 4, 2017 at 3:11 am

That’s true, but once you scale those walls, you are free to produce lots of marginal stuff, which might explain certain correlations here.

Reply

19 ChrisA December 4, 2017 at 6:52 am

Al – I don’t think that contradicts my point – yes it is hard to get to the position where you can generate patents, but it doesn’t require genius like Einsteins to get there.

Reply

20 Al December 4, 2017 at 11:42 am

Agreed. The idea that one needs to be comparable to one of the greatest minds in history to create patents is laughable.

Reply

21 Dots December 5, 2017 at 5:51 pm

Hopefully if we had more engineering projects we would have more hi quality engineering firms – tunnels for cars and subways in the major cities, more skyscrapers, the toys the boys need for a new century of cold war

Reply

22 Steve Sailer December 4, 2017 at 5:54 am

Why is Chetty’s study of inventors and patents called “Lost Einsteins” instead of “Lost Edisons”?

Granted, the scientist Einstein worked in a patent office when young, but he is not famous for his patents, whereas the inventor Edison had his name on 1,093 U.S. patents.

Is Chetty just confused?

Reply

23 Jeff R December 4, 2017 at 10:42 am

Probably.

Reply

24 Al December 4, 2017 at 12:04 pm

The idea that there are Einstein’s lying around, IQ 170+ people [1] who were not swept into the system and are not living very productive lives is comical. They will be found, either by their teachers (at every level), or by standardized tests, or competitive tests. Good Will Hunting was a fun movie but it was fiction.

[1] some may have mental health issues which limit them.

Reply

25 Rafael R December 4, 2017 at 12:52 pm

I disagree. It’s obviously true that there are millions of smart people who are not very high in the social hierarchy. This can be due to many factors such as: choice (working hard generates dis-utility), luck (social connections as Chetty said, it’s obvious that people with social connections will be able to contribute to the frontier in a way that a lone wolf working in the garage cannot and getting social connections is mainly a matter of luck). Now, that doesn’t mean that there are policy implications in here.

Reply

26 Al December 4, 2017 at 2:35 pm

I bet that the phrase “not very high in the social hierarchy” is doing almost all of the work in your claim.

My claim is that people at the very far right of the curve, the “Einstein’s” are to a 1st order approximation found, to a person, by the current system. Such people will excel at during a portion of their education and the system will give them (and their parents) nudges, it doesn’t take a lot of nudging at the right end of the curve. By this I mean that they will, almost to a person, have degrees from universities and will be leading productive lives.

What’s your counter claim, exactly?

27 Al December 4, 2017 at 2:36 pm

Wait, did you say millions? MILLIONS of people who are “Einsteins”? Ah. I get it, you have no idea what you are talking about. I retract my previous statement asking you to state your claims. You have none.

28 Dots December 5, 2017 at 6:05 pm

There was a surprising interactive article in the new York times showing that many jobs r much likelier to b done by people whose parents also did those jobs. My mom was a nurse my sis is a nurse. Same with aunt/cousin. My bffs’ folks were firefighter and musician, now one bff is ff other musician.

Maybe there r ways for us to drop more kids off at your climbing valley, if only by giving u and ur colleagues parental leave, subsidizing patent-happy firms to permit more hiring, allowing more engineering projects to b realized, funding more science and commingling it geographically with the gifted and impressionable, subsidizing more internships/apprenticeships for smart kids, coercing more firms into r&d

Reply

29 Impolitic December 4, 2017 at 12:28 am

Whoo boy … First, third grade math test ventile is a poor metric of innate ability; second, most patents are worthless if not counterproductive and we need fewer of them; and third, Einstein did not produce any “highly impactful innovations” in the sense meant here.

Reply

30 Maz December 4, 2017 at 4:19 am

They say that test scores explain “relatively little” of the various gaps, but actually they explain about a third, which is quite a lot, especially as third-grade math test scores are not a very good measure of adult ability. Measurement error in the test scores also biases their estimates of between-group differences, with the ability of the members of low-performing groups like blacks overestimated. With better tests, ability would probably explain >50%.

Reply

31 Maz December 4, 2017 at 5:00 am

In fact, they have reading scores for 8th grade and they explain 48% to 51% of income and some racial gaps in patents.

Reply

32 Al December 4, 2017 at 1:09 am

Slide 62 was interesting, the wages of patent holders are quite a bit higher than those of the general population. The effect seems higher than the effect for even a PhD. That was interesting.

Sad that they didn’t have a better source of IQ data, I do not know the g-loading of NY math tests (see slide 20). I wonder if the NLSY could give better explanations, although the sample size will be woefully smaller. Access to SAT data would also, likely, be very illuminating.

What is going on in slide #29?

Slide #47, WTG Madison.

Slide #71/80 LOL that was unexpected. I kid. It was not.

Finally #82 : lost Einsteins … the US’s excellent SAT system, and other counties similar systems make this unlikely. If you are in the top 1% in cognition (or further along in the distribution) you’ll likely be found.

Reply

33 Steve Sailer December 4, 2017 at 5:59 am

Caroline Hoxby of Stanford’s studies have found that the high school students in top 10% of test scores who are most often overlooked by prestige colleges are white boys in flyover states:

http://www.unz.com/isteve/more-on-americas-overlooked-smart-kids/

Reply

34 Al December 4, 2017 at 11:45 am

Top 10% isn’t high up the rankings when talking about elite universities. With that level of accomplishment one needs ‘extra factors’ to consider an elite university.

Reply

35 Steve Sailer December 4, 2017 at 9:43 pm

Indeed, but flyover white boys tend to be pretty clueless about how to pad their applications with “extra factors.” Our culture puts a lot of emphasis on finding black and Hispanic talent plus female talent. The Asians do it for themselves. So not surprisingly that leads to the most overlooked source of talent being white males outside the upper middle class and outside the coastal metropolises.

Reply

36 Steve Sailer December 4, 2017 at 6:19 am

Slide #47, WTG Madison. (#2 zone for inventors growing up)

The map on #46 looks straight out of Fischer’s Albion’s Seed, with the New England Yankees spreading across the northern tier and recruiting Germans and Scandinavians as they go. The Pennsylvania Midlanders who spread west at a lower latitude in the north are less inventive but still quite good, and the two southern tiers, the Scots-Irish and the Lowland South are not very inventive.

Reply

37 Steve Sailer December 4, 2017 at 6:24 am

Also, as I mentioned before, northern college towns like Madison, WI play a big role in the childhoods of modern American inventors, a point that Neal Stephenson emphasizes.

Here’s an old interview of Stephenson by Laura Miller on his fascination with the Puritans who invented the culture that has descended to Northern college towns:

http://www.unz.com/isteve/neal-stephenson-on-puritans-and/?highlight=stephenson

Reply

38 Zach December 4, 2017 at 5:05 pm

Slide 62 was interesting, the wages of patent holders are quite a bit higher than those of the general population. The effect seems higher than the effect for even a PhD. That was interesting.

Not that surprising. Patents are issued to individuals, even when a corporation paid for the work and the patent application. The recipient then assigns the patent to their employer.

Not surprisingly, people who are paid to produce patentable innovations tend to be paid very well, even in comparison to similarly qualified people who don’t have such jobs.

Reply

39 Krzys December 4, 2017 at 3:10 am

There’s something really off with the data. Looking at graphs on slide 23 and 31, they show really strange nonlinearities. For p80 income group, you don’t reach the high innovation rates of kids with scores 1 std BELOW the average until you are almost 2 std ABOVE the average. In fact, all the other buckets are way below those two. Same for whites on slide 31. This makes no sense. Some big variable is missing or lots of noise.

Speaking of noise: considering how few black/Latino kids score 2 std dev above the mean, how noisy is the estimate of the innovation rates for those groups?

Reply

40 Steve Sailer December 4, 2017 at 6:05 am

Is Chetty’s test score data solely from New York City public schools?

New York’s K-12 education scene is famously bizarre, with ambitious white parents insanely focused on getting their kids into prestigious private kindergartens, while Chinese parents are focused on the public exam schools like Stuyvesant:

“For the 2013 academic year, the student body was 72.43% Asian and 21.44% Caucasian, 1.03% African American, 2.34% Hispanic and 3% unknown/other.”

If you have a smart black child, why bother with NYC public schools when elite private schools are likely to give your child an affirmative action scholarship to diversify its student body?

Reply

41 Maz December 4, 2017 at 6:33 am

Yep, test scores are from NYC public schools. It’s always like this with Chetty: at first blush, he seems to have large amounts of great data, but if you look closer, it’s clear he’s missing tons of crucial data, something that he tries to paper over so that he can maintain his confident tone.

Reply

42 Steve Sailer December 4, 2017 at 6:48 am

And he only has parents’ tax return data on inventors who got patents by age 32, so that’s only about 35,000 inventors. So how many of these 35,000 went to NYC public schools in the late 20th Century? I’m just looking at the slides so I haven’t seen raw numbers but I’m guessing about, say, 1,000.

On the other hand, 1,000 patent-holders with parent’s incomes and grade school test scores, well, that’s still a pretty interesting database. On the other hand, I’m wondering how representative this NYC data is since NYC is so different from the rest of the country in terms of K-12 education.

For example, Chetty is reporting that blacks are 30% as likely to become inventors as whites, while Hispanics are only 7% as likely. But I suspect that impressive percentage for black inventiveness is due to NYC having elite immigrant blacks and some remnant of the Harlem Renaissance elite of American blacks. I doubt if in the rest of the country blacks are 30% as likely to hold patents as whites.

Reply

43 Krzys December 4, 2017 at 12:17 pm

The 1% and 3% rate of black and latino high achievers underscores how small the respective populations are and hence how extremely noisy any estimates of their invention rates will be. The race thing in this paper is worthless.

Reply

44 Steve Sailer December 4, 2017 at 5:09 am

Admittedly, Steve Jobs wasn’t exactly an inventor, but his life story is extremely well-documented and is particularly interesting for thinking about success in technology because he was, in effect, a one man adoption study. Walter Isaacson’s 2011 biography delves into many of the nature and nurture questions, and my review reports on what Isaacson found:

http://www.unz.com/isteve/steve-jobs-nature-nurture-and-apricot-orchards-in-silicon-valley/

Reply

45 pyroseed13 December 4, 2017 at 10:14 am

To this point, while Chetty argues that differences in ability do not explanation differences in patenting behavior across those income groups, my understanding is that certain personality traits are a strong predictor of whether you will become an inventor/entrepreneur, and personality is highly heritable.

Reply

46 Jeff R December 4, 2017 at 10:46 am
47 dearieme December 4, 2017 at 6:56 am

‘“lost Einsteins” – individuals who would have had highly impactful inventions’: I know of only one invention attributed to Einstein. That’s fewer than I have. Innovations, though: his were perhaps few but certainly huge. I dare say his aesthetic judgement would have led to his hating “impactful”, but who knows?

Reply

48 JFA December 4, 2017 at 7:27 am

“We develop a simple model of inventors’ careers that matches these empirical results.” Props to Chetty, et al., for not claiming they came up with the model and then found that the data confirmed the model (as is the case with most economists). That being said, it would have been better had they split their sample into a training and test set. Then they could have fit the data, come up with the theoretical model, then used the test data to confirm (or not) the model. Why is this not done more in econ (I’m saying this as an econ PhD)? Especially as researchers start working with larger data sets, this seems like the path to follow (this would also build in replication to the research process).

Reply

49 Maz December 4, 2017 at 7:39 am

+1

Reply

50 dearieme December 4, 2017 at 10:43 am

Maybe they don’t bother because fellow economists will just assume they’re lying about the sequence of events.

Reply

51 Mulp December 4, 2017 at 11:52 am

Reading this sentence carefully will lead you to conclude economists are illogical in confusing cause and effect.

“Taxing profits from innovation then lowers the number of potential innovators quite a bit, by discouraging investment from the intermediaries.”

Profits require reducing the number of inventors/innovators.

If the lure of profits, ie, the ability to price higher than all in costs, spurs invention by large numbers of innovators, production will increase faster than demand, requiring cutting prices to or below current all in costs.

E.g., Elon Musk is pricing cars below current all in costs, even when prices are extremely high, because he is planning to explode demand in such a way that he will see such high volumes the economies of scale costs will fall below price before he goes bankrupt. Elon has stated multiple times in multiple contexts he has a very high risk of failure because of competition with greater capital capacity.

Nothing Elon has done couldn’t have been done by GM. GM built a fleet of great electric cars larger than the Roadsters Elon built five years later that put Tesla on the map. The difference is Elon has been willing to lose money on EVs on a cash flow basic and GAAP basis in the hopes that Tesla can be a major specialty automaker in a sea of a dozen much bigger manufacturers. Tesla has partnered with Panasonic, a cell maker, on a battery factory that is at the core of both power generation and transportation. Elon certainly expects Panasonic to be a competitor in manufacturing batteries, with that not resulting in immediate direct competition due to the high cost of labor building capacity throughout the supply chain, especially demand.

Invention and innovation in batteries will not result in profit. Ideally it will produce ROIC slightly higher than the roughly 2-4% interest on cash savings over the several decade life of a factory production line.

Reply

52 rayward December 4, 2017 at 7:53 am

Taxes, taxes, taxes! Enough, already. Did Steve Jobs not invent the consumer computer because taxes? No, he invented it, produced it, and sold it, then hired tax lawyers and accountants to figure out how to avoid taxes on all the income his invention produced. Do talented young people sit around in their dorm rooms at night obsessing over how taxes discourage them from inventing.

Reply

53 rayward December 4, 2017 at 8:08 am

Why did Apple shift production to China? Because of taxes? No, because of China’s cheap labor. And because of China’s very cooperative government. It was the cheap labor and cooperative government that produced enormous profits that necessitated Apple’s tax lawyers and accountants to figure out how to avoid taxes on all those profits.

Reply

54 ChrisA December 4, 2017 at 11:52 am

The motivation of a particular innovator may not be particularly affected by the tax system, but note the title of this blog. For sure there will be less marginal innovators in a high tax system for the simple reason that there will be less rent to share among the innovators. Another way of thinking of this is that the VC industry would have a lot less cash to spread around if tax rates were higher as the marginal investor would have to get much higher gross returns to give him his risk adjusted acceptable return.

It is sort of like the idea that high wages for CEOs are not there to motivate the actual CEO but to motivate potential CEOs who aspire to get to CEO level. The higher the pay the more people compete for the role, and the more subordinate positions work hard as well.

Reply

55 rayward December 4, 2017 at 12:54 pm

Investors derive the greatest return from capital appreciation not the earnings realized by the companies in which they invest. Of course, capital appreciation is taxed at very favorable rates and income (i.e., capital gain) can be deferred as long as the investor chooses; indeed, for many investors, it means that the capital appreciation is never subject to tax because the investor never recognizes the gain and dies, death forever avoiding tax on the capital appreciation. Indeed, it’s the same story for the innovators, as the appreciation in their equity interests of the start-up can be forever deferred and even when recognized, it’s taxed at favorable capital gains rates. Tax lawyers and accountants earn their fees.

Reply

56 Mulp December 4, 2017 at 2:07 pm

“Another way of thinking of this is that the VC industry would have a lot less cash to spread around if tax rates were higher as the marginal investor would have to get much higher gross returns to give him his risk adjusted acceptable return.”

Given lots of investment is funded by debt, then interest on savings should reflect the risk-reward. Are you arguing the low tax rates are the reason savings earn virtually 0% and firm’s are borrowing money from savers to buy competitors and shutdown capacity, rather than build new production themselves?

Why are companies buying competitors instead of borrowing low interest money to invent and innovate and bring more innovative products to market?

Wouldn’t profits on self driving technology be higher if a dozen vendors were selling self driving technology in competition.

They would hike prices to hike profits to get more customers for each of their dozens of competing products, based on your statement.

Reply

57 Mulp December 4, 2017 at 1:56 pm

“It was the cheap labor and cooperative government that produced enormous profits that necessitated”

False!

Jobs wanted to manufacture in the US in Apple factories so he could keep everything under Apple’s secret control.

Tim Cook convinced Jobs that the US was no longer able to manufacture consumer products because US industrial policy was to promote the high profit on methods instead of driving US businesses to constantly invent and innovation with zero profits, just market ROIC.

Milton Friedman argued that high tax rates on profits favored building too much production capacity to increase the business revenue, especially new production that promotes consumers to buy more new stuff they obviously don’t need because it’s new. But all the added capacity and new products force prices down while destroying the value of old production capital, both bad for shareholders.

Thus public policy was driven to shift from promoting innovation to promoting higher profits from limited investment in invention and innovation in manufacturing. Many US factories were closed and the production lines moved without change to Mexico based on using cheaper labor to keep producing the same products that had been highly inventive and innovative in the 60s.

In Asia, first in Japan, then Korea and Taiwan, and then in China, factories were built from scratch using the most inventive and innovative equipment and processes. US equipment makers who had supplied US factories during the high innovation pre-Reagan era were desperate to supply Asia with equipment. The alternative was bankruptcy.

When you shutdown factories, you then lose all the human capital.

Making Apple consumer produces in the US was impossible for a company Wall Street considered bankrupt. No way could Steve Jobs afford to be Elon Musk. Jobs could not come out with an iPod that sold only in the tens of thousands for $2000 each. Nor could he do what Musk is doing now in building a huge US factory with billions in labor costs building the capital including training all the workers enough to invent the highly automated factory with one machine feeding parts into the next machine steadily until the final machine spits out a car (battery pack).

I have not seen economists explain how Jeff Bezos and Elon Musk have had such huge impact and high growth by innovating and inventing while having zero profit and thus paying zero business profits taxes. People like Bezos and Musk were common in the 50s and 60s in their ability to build entire manufacturing businesses from very little that transformed the products everyone bought.

Google, Facebook, Twitter, et al, are rent seekers built on Asian factories where profits are zero to low to build consumer electronics that sell at near cost by the tens of millions. Asian manufacturers pay more in taxes because they can not deduct labor costs from the primary business tax, the VAT, and when the VAT and profit tax is added together, profits in Asia and Europe are taxed more than in the US.

After all, profit is justified only if it adds value to a product, right?

If profit comes from restricting supply and hindering a free market, it’s bad, right? Or do economists today argue profits justify ending free markets to increase them?

Reply

58 Dots December 5, 2017 at 5:44 pm

+1

Reply

59 rayward December 4, 2017 at 8:20 am
60 Ian Maitland December 4, 2017 at 9:54 am

Slide 47 reminds me of Daniel Patrick Moynihan’s famous observation: The best predictor of math test scores is proximity to the Canadian border.

Reply

61 dearieme December 4, 2017 at 10:44 am

I dare say that works in Canada too.

Reply

62 Steve Sailer December 4, 2017 at 9:45 pm

Indeed.

Reply

63 Atttila Smith December 5, 2017 at 2:46 pm

@Ian, @Steve: sorry, I don’t understand your comments. What is so different from the US math teaching in Canada?

Reply

64 ʕ•ᴥ•ʔ December 4, 2017 at 11:43 am

Not all seeds fall on fertile ground, not all receive spring rain.

That seems simple enough.

And “they were probably bad seeds” seems the wrong fable.

Reply

65 ʕ•ᴥ•ʔ December 4, 2017 at 11:46 am

Oh, and this bit misses a path dependence:

“Taxing profits from innovation then lowers the number of potential innovators quite a bit, by discouraging investment from the intermediaries.”

Anything throwing off high profits for high brackets is past the discouragement stage. Look instead at national healthcare for garage tinkerers. Etc.

Reply

66 Rafael R December 4, 2017 at 1:05 pm

I think the main problem of Chetty et al is that they think “patents” are a perfect measure of innovation but they are not. While a black guy from the ghetto might be less likely to become a patent holder than a harvard educated white guy from the upper middle class he contribute with other types of innovations such as opening up a new barber shot in his ghetto, supplying a good that wasn’t supplied before. Patent innovations by big corporations are only a very small fraction of the total level of innovation in the economy. To encourage innovation policy would to be make it as easy as possible to open up new businesses (i.e. the Ease of Doing Business rating).

Reply

67 Steve Sailer December 4, 2017 at 9:46 pm

Patents aren’t perfect by any means, but they are a decent metric to be interested in.

Reply

68 Zach December 4, 2017 at 4:52 pm

A patent isn’t just an offshoot of tinkering in the garage. It’s an expensive investment that requires the assistance of highly paid experts and takes multiple years to return anything.

Are we really surprised if the people making expensive, speculative, long-term investments tend to be wealthy?

Second issue: patents are issued to individuals, but frequently assigned to the corporation that paid for the work and underwrote the patent application. Here again, you’re talking about highly paid and well trained professionals.

Reply

69 Zach December 4, 2017 at 5:21 pm

Honestly, I don’t see a way around this, even in theory. Patents might work as a marker for innovation on the scale of a country, over many years with a stable patent regime. But when applied to individuals, it’s a measure of innovation plus a business plan, or else innovation plus being employed by a large corporation which is the true owner of the patent.

A perfect marker for innovation would be something that is costless and which nearly always accompanies the type of innovation you’re interested in. A patent is almost the opposite of that.

Reply

70 JohnB December 4, 2017 at 5:34 pm

I have worked for several computer companies. At each one, at some point there was a big management push for more patents, with rewards for submissions of ideas to a screening committee and a much bigger reward if the patent issued. Typically the submission reward was a hundred dollars while the issue reward was a few thousand dollars. Surprisingly to me, very few of my peers even submitted one idea. But the ones who did submit ideas submitted a large number and many ideas turned into issued patents. I know several people who have ten or more patents issued.

The big corporate pushes came, I suspect, from patent wars between companies: company A says “You have violated my ten thousand patents” to company B. Company B replies “You have violated my nine thousand patents” back and they agree to cross-license. This means that little companies D to Z with only a handful of patents each are doomed: they can’t afford to litigate the nineteen thousand shared patents, no matter how weak those patents are, because there are so many of them. My employers want to be in the group with thousands of patents rather than in the group with just a few.

For an individual in a technical field, in my experience, a patent is “resume gold”.

Reply

71 Get into PC December 4, 2017 at 9:32 pm

The big corporate pushes came, I suspect, from patent wars between companies: company A says “You have violated my ten thousand patents” to company B. Company B replies

Reply

72 apkpure December 4, 2017 at 9:33 pm

orate pushes came, I suspect, from patent wars between companies: company A says “You have violated my ten thousand patents” to company B. Company B replies

Reply

73 Floccina December 4, 2017 at 11:23 pm

The thing that I always wonder about that is at what age did they measure parental wealth. Like my dad was a private in the fore dpt with 5 children when my patent holder brother was 10, my dad later got rich. Would my brother be a poor kid doing good or a rich kid doing with the help of privilege? Seems pretty typical.

Reply

Leave a Comment

Previous post:

Next post: