Month: January 2004

Patent theory versus patent law

According to the economic theory of patents, patents are needed so that pioneer firms have time to recoup their sunk costs of research and development. The key element in the economic theory is that pioneer firms have large, hard to recoup, sunk costs. Yet patents are not awarded on the basis of a firm’s sunk costs. Patent law says the subject of a patent should be novel, useful and non-obvious but nowhere does it say the original idea should have required extensive costs of research and development as the economic theory would predict.

The disconnect between the economic theory and what patent law actually requires suggests that patent law could be improved by bringing it into greater conformity with economic theory. Why, for example, should every patent get 20 years of protection regardless of costs? Why not have patents of shorter length for those ideas that required little R&D? (Amazon’s one-click shopping patent comes to mind). I think that such a system is possible and discuss it further in the following paper.

Tabarrok, Alexander. 2002. Patent Theory versus Patent Law (subs. required or email me). Contributions to Economic Analysis & Policy 1 (1), Article 9.

In defense of choice

Here are some brickbats for my economist and libertarian readers:

†¢ Sheena Iyengar and Mark Lepper, psychologists at Columbia and Stanford respectively, have shown that as the number of flavors of jam or varieties of chocolate available to shoppers is increased, the likelihood that they will leave the store without buying either jam or chocolate goes up. According to their 2000 study, Ms. Iyengar and Mr. Lepper found that shoppers are 10 times more likely to buy jam when six varieties are on display as when 24 are on the shelf.

†¢ In a study that Ms. Iyengar, Rachel Elwork of Columbia and I are working on, we found that as the number of job possibilities available to college graduates goes up, applicants’ satisfaction with the job search process goes down. This is particularly true for job seekers whose aim is to get the “best possible” job – while people in this group receive more and better job offers than those who are aiming for “good enough” jobs, they also tend to be less satisfied with their career decisions than their less demanding counterparts. They are also more anxious, pessimistic, disappointed, frustrated and depressed.

†¢ In another study under way, Ms. Iyengar found that as the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund – any fund – goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money-market funds.

†¢ Carl Schneider, a law professor at the University of Michigan who specializes in medical ethics, has reported that patient satisfaction goes down when the choice of pharmaceutical and medical treatment goes up.

One illustration of the mismatch between how choice appears in theory and how it feels in daily life comes from a 1992 study by Lesley F. Degner and Jeffrey A. Sloan in The Journal of Clinical Epidemiology. People were asked if they would want to be in charge of their treatment plan if they had cancer. For those who had never had cancer, 65 percent answered “yes.” For those who had already had cancer, only 12 percent said that they would want to oversee their own treatment.

Here are eight letters in response. Consider this one:

As a neophyte shoe salesman, I was told never to show customers more than three pairs of shoes. If they saw more, they would not be able to decide on any of them.

My take: No doubt, choice confuses the hell out of us, much of the time. That being said, the question is not whether more or less choice is good. Instead the question is what kind of choice-restricting and choice-regulating institutions we wish to have. Markets, in reality, are the best known institutions for limiting our choices as well as expanding them. When I go into a (good) restaurant, I like to simply tell the waiter that I don’t want to look much at the menu, and he should simply bring me what is best. If he asks what that means by “best,” I (sometimes) respond by telling him I am an aesthetic Platonist and that best is best. Or I will ask the waiter to imagine it is his last meal on earth and to bring me the relevant dishes he would order. Other times, such as when I am buying classical compact discs, I wish to survey all the available information before buying Freddy Kempf’s stunning Transcendental Etudes, composed by Franz Liszt. Have I mentioned it is the sixth recording of those pieces in my collection?

What if you asked people the following: do you wish to choose your own means of limiting your (subsequent) choices, or do you wish to let someone else, perhaps the government, do the work? I suspect the answers would overwhelmingly favor the former option, namely voluntary choice at the meta-level. And if you reexamine the experiments mentioned above, they are all about ways in which people voluntarily limit their own choices. Maybe you don’t wish to run your own cancer treatments, but you wish to choose the doctor who will.

I am indebted to Daniel Akst for the pointer to the link and topic. By the way, check out his old column on whether you are free-riding if you buy and hold a broad stock index. He is one of the most interesting financial journalists around, in addition to being an accomplished novelist.

New requirements for government lab scientists?

Under new plans to reorganize the Commissioned Corps of the U.S. Public Health Service, some 6,000 scientists and other public health experts–including not only emergency responders but also laboratory scientists–would have to pass an “Annual Fitness Test.” The test would measure not their research prowess, but rather their abilities in the 1.5 mile walk, 500 yard swim, and at push-ups and sit ups.

Of course these measures may well not go through. But there is a precedent of sorts, do we not require our Presidents to be tall and (relatively) good-looking?

The link is from Chris Mooney, who recently has geared up his blog to be even better than before. Chris is the guy who keeps us all honest when it comes to politics and science, right-wingers won’t always find it comforting reading.

Are test-tube mice different?

They are bolder and more confident, but have poorer memories, here is the story.

And humans?

Studies are needed to see if test-tube humans are similarly affected, he says…In the Western world, around 1% of children are conceived through assisted reproductive technologies. In one common method known as in vitro fertilization, eggs are fertilized in a test tube, cultured for a short while and then returned to the womb. Over a million ‘test-tube’ babies have been born worldwide. But little is known about the long-term effects of culturing embryos. The world’s first test-tube baby, Louise Brown, was born just 26 years ago. There have been few systematic attempts so far to assess the long-term health and behaviour of these children.

Food for thought, perhaps we are engaging in social experimentation here without knowing it.

Can climate engineering limit global warming?

Maybe so, according to Futurepundit. Here are some options (not all of this represents Futurepundit’s words, some is from his links):

Proposed options for reducing carbon dioxide pollution currently include underground burying of liquefied carbon dioxide; disposal in the sea; fertilising its absorption by marine algae; reflecting the sun’s rays in the atmosphere; and stabilizing sea-level rise. These and other macro-engineering ideas will be evaluated against a strict set of criteria, including effectiveness, environmental impacts, cost, public acceptability, and reversibility. All of these options go beyond the conventional approaches of improving energy efficiency and reducing carbon intensity by using more renewable energy sources, and may be needed in addition to these conventional approaches.

And further out on the limb:

… the scientists backed more way-out systems for reflecting the sun’s rays back into space. Plan A would float thousands of bubble-making machines across the world’s oceans to send huge amounts of salt spray into the atmosphere. The trillions of tiny droplets would make the clouds bigger, whiter, and more reflective — enough, in theory, to shut down several decades worth of global warming.

Plan B would flood the stratosphere with billions of tiny metal-coated balloons, “optical chaff” to backscatter the sun’s rays. Most sophisticated of all, Plan C would assemble giant mirrors in orbit, ready to be positioned at will by a global climate controller.

The BBC reports on 4 major categories of conceivable climate engineering approaches.

* “sequestering” (storing) carbon dioxide, for example in the oceans, by removing it from the air for storage, or by improved ways of locking it up in forests
* “insolation management” – modifying the albedo (reflectivity) of clouds and other surfaces to affect the amount of the Sun’s energy reaching the Earth
* climate design, for example by long-term management of carbon for photosynthesis, or by glaciation control
* impacts reduction, which includes stabilising ocean currents by river deviation, and providing large-scale migration corridors for wildlife.

Here is another article on the topic. I’ll never be competent to assess these proposals, but they could be among the most important scientific innovations we come up with. Global warming may well be real and the result of human activity, follow Chris Mooney. For better or worse I’ll predict the world won’t much cut its CO2 omissions in the near future, so we need to look toward other solutions.

A famous economist paints

Here are some paintings by economist William Baumol. Baumol has done much notable work, my personal favorite is his recent The Free-Market Innovation Machine on how oligopolistic competition drove the innovation behind the Industrial Revolution. Unlike many others, Baumol has never called it quits. He is still going strong at 81 years of age and producing some of his best work.

Thanks to Greg Delemeester for the pointer.

Are blogs now hurting Howard Dean’s chances?

Dean did poorly because not enough people voted for him, and the usual explanations — potential voters changed their minds because of his character or whatever — seem inadequate to explain the Iowa results. What I wonder is whether Dean has accidentally created a movement (where what counts is believing) instead of a campaign (where what counts is voting.)…

…participation in online communities often provides a sense of satisfaction that actually dampens a willingness to interact with the real world. When you’re communing with like-minded souls, you feel like you’re accomplishing something by arguing out the smallest details of your perfect future world, while the imperfect and actual world takes no notice, as is its custom.

There are many reasons for this, but the main one seems to be that the pleasures of life online are precisely the way they provide a respite from the vagaries of the real world. Both the way the online environment flattens interaction and the way everything gets arranged for the convenience of the user makes the threshold between talking about changing the world and changing the world even steeper than usual.

The bottom line:

“Would you vote for Howard Dean?” and “Will you vote for Howard Dean?” are two different questions…

Not to mention “Did you vote for Howard Dean?”

The quotations are from Clay Shirky, here is the permalink. Shirky concludes: “Voting, the heart of the matter, is both dull and depressing.”

Econometric Poetry!

I am teaching econometrics this semester and am thinking about putting the following poem by the American poet, J.V. Cunnigham on the final exam and asking students to prove. Yes, it is fun being a professor! 🙂 Hat tip to Aaron Haspel at God of the Machine.

Meditation on Statistical Method

Plato, despair!
We prove by norms
How numbers bear
Empiric forms,

How random wrong
Will average right
If time be long
And error slight;

But in our hearts
Curves and departs
To infinity.

Error is boundless.
Nor hope nor doubt,
Though both be groundless,
Will average out.

–J.V. Cunningham

Blackjack and haystacks

The Boston Museum of Fine Arts is sending 21 Monet masterworks to the Bellagio Casino in Las Vegas, in return for a payment of at least $1 million. Here is some promotional material, here is another account.

From my point of view this is good news. The museum has 36 Monet paintings (an MFA curator tells me 80 but I cannot confirm this in print), and they cannot be displayed all at once. Only five Monets will be taken down from the walls to run the show. The Casino brings in more customers, and more people will see the art of Monet. The Bellagio Gallery is run by international art dealers Pace Wildenstein, who have expertise in displaying quality paintings. The casinos themselves are masters of security and climate control, two important factors in any art show. On top of everything, the MFA is not a major recipient of state and federal grants, so now it has more revenue to stage future shows.

What then is the problem? Art world critics charge that the museum is “selling out,” by lending art in return for money. But surely blatant commercialism has a long and often noble history in the artistic world. Most of the notable artists of the Italian Renaissance were consummate businessmen, and they produced for patrons who had their own motives of power, profit, and status. Furthermore few museums predate the nineteenth century. Before that time commercially (or politically) motivated collectors played a primary role in producing artistic publicity.

The real issue: Many people in the museum world are afraid this venture will succeed. If a museum can make money lending pictures to a casino, why do such institutions need explicit government support? Right now museums. for better or worse, are often the major artistic agenda setters. Greater commercialization threatens to take this role away from museums and place it in the hands of the greater public. People will pay $15 to see Monets in a casino, but not to see Robert Gober.

Have you noticed that Clear Channel, the media company and Rush Limbaugh promoters, is now in the business of organizing art exhibits on a for-profit basis.? This too is unpopular with the traditional museum crowd, for competitive, aesthetic, and political reasons. Clear Channel plays commercial hardball with the display sites and puts the exhibit together in a year or two. A non-profit museum, in contrast, will invest in greater scholarship and perhaps take ten years or more to put together an exhibit. This market is starting to change rapidly, and museum curators are scared. Unlike most Americans, I prefer to see Gober over Monet. But at the same time I wish that museums enter and master the future to come, rather than running away from it.

A readable treatment of current macroeconomics

Is there a new consensus about macroeconomics? Read this recent essay by Perry Mehrling.

Mehrling makes the following points:

1. Macroeconomists are more optimistic than before, in part due to the 1990s extended, low-inflation boom.

2. Monetary policy has replaced fiscal policy as the preferred instrument of stabilization.

3. The current consensus would look remarkably familiar to many of the pre-Keynesian monetary theorists, such as Ralph Hawtrey.

4. The more concerned we are with price stabilization, the more our economies take on properties of commodity money standards. Money is moving again toward the notion of a “promise to pay.”

Read the whole article for a stimulating treatment of further critical issues. If you would like a more technical and theoretical treatment, for macro nerds only, try Michael Woodford’s recent Interest and Prices: Foundations of a Theory of Monetary Policy. Fans of Wicksell (notice the title) and the conundrums of Fischer Black will enjoy Woodford’s work, which reexamines the central assumptions of monetary theory. Think of the book as the 21st century version of Don Patinkin’s Money, Interest, and Prices. And what are we told in practical terms? The price level is best controlled through interest rate policy.

Thanks to Daniel Davies for the pointer to Mehrling’s home page.

A (slightly) reassuring fact

A penny dropped from the Empire State Building would not kill someone standing below, most likely. The observation deck is 1050 feet high, and the penny would reach a maximum velocity of 57 miles an hour after falling 500 feet. That’s enough to hurt pretty bad, but only a very very lucky (unlucky) shot would kill you. Most importantly of all, there is an updraft. Tossed coins generally land on the setback roof of floor 80.

The calculations come from the February issue of Popular Science, the article itself is not available on-line.

Addendum: Cecil offers some more detailed observations. Here is another supporting account, albeit with different details, in engineering language.

Another reason for vouchers

After a few parents complained that their children might be ridiculed for not making the list [of honor-roll students], lawyers for the Nashville school system warned that state privacy laws forbid releasing any academic information, good or bad, without permission….As a result, all Nashville schools have stopped posting honor rolls, and some are also considering a ban on hanging good work in the hallways…”

Principal Steven Baum “thinks spelling bees and other publicly graded events are leftovers from the days of ranking and sorting students” and says “I discourage competitive games at school. They just don’t fit my worldview of what a school should be.” (From the Wash. Post)

If paintings were stocks

Friday’s Wall Street Journal offers an update on who is hot in the art market, classifying artists into buy, hold, and sell categories. The big winner? Cindy Sherman, art photographer. Why have her prices skyrocketed so much? First, the quality of the work is high. Second, she is a woman and museums feel the need to address the gender gap on their walls. Third, Sotheby’s and Christie’s now sell her under the “Contemporary Art” category, rather than “Photography.” This reclassification automatically boosts her prices.

Here is one of the classic Cindy Sherman images, but not all of them involve beautiful women.

Another big winner was Jeff Koons, former Wall Street commodities broker. Here are some typical Koons pieces, although his style is highly diverse, as NBA fans will attest. His prices have doubled in each of several recent years. Damien Hirst is on the upswing as well, so are some of the late Picassos. Among the classics there is also price strength with Cezanne, Gauguin, and Caillebotte.

Who is falling in price and due to fall more? Julian Schnabel. Some of the works are falling apart, and others are too big for collectors’ walls. Could you hang and maintain this one? Warhol has cooled off after a big run-up and it is opined that Basquiat (scroll down to the images) is due for a fall. Chagall painted too many mediocre pictures. Collectors are bored with Sisley and the sometimes fruity style of Renoir has fallen out of favor, despite its painterly virtues. This one will likely push you off the edge.

My take: The current generation of earners doesn’t care much about uniqueness or the original image. Younger collectors love to buy photographs, and don’t care if they don’t “own the original” or if that phrase has meaning at all. Many prefer that an exact copy of what is on their wall also hangs in the Museum of Modern Art. So look for photography, and painting/photography hybrids to continue their run-up.

I like to tease Robin Hanson that the painting market is a bit like terrorism futures. If you believe in a particular painter or style, you can put your money where your mouth is. The paintings market therefore might reflect new information might efficiently than does, say, the music market, where marketable investment assets are harder to come by. Of course that does not rule out the art market as a classic Keynesian “beauty contest,” in which everyone is guessing at the future opinions of everyone else, rather than at some objective facts.

It’s simple, part II

“For the past two years our farmers have struggled with historically low milk prices,” said Senator James Jeffords, an Independent from Vermont who often votes with the chamber’s Democrats. “The last thing we need right now is a flood of imported milk products that could drive prices even lower, perhaps permanently.

Imagine the horror, permanently low prices! And what is the political context?

Senators from dairy states like Vermont fear that a proposed US-Australian Free Trade Agreement could mean “undue hardships” for American milk producers…More than 30 senators signed a letter to President Bush last week that said the proposed trade agreement “would have dire consequences for several of America’s agricultural industries including the dairy industry…

By the way, current U.S. tariffs on Australian dairy products average about 100 percent. The above facts are from the Sunday Boston Globe, the article is not currently on-line.

Are you wondering what the title of this post means? Here is “It’s Simple” [part I], in case you missed it a few days ago.