I’ve been wondering about a few questions.
Internalizing externalities is a common theme in economics,and it’s also called capturing the value you create. Don’t economists believe this happens — and happens increasingly — all the time? Karl Smith writes (and you can find his caveat here):
TFP growth depends on the returns to innovation not being captured by the innovator. Otherwise it becomes a return to the factor of production rather than total factor productivity.
Does TFP tend to fall once it has been high for a while? Is falling TFP, following a technological breakthrough, a sign of the market’s ability to capture value and internalize externalities? And is this another reason why we might prefer imperfectly defined intellectual property rights?
The second question concerns the Industrial Revolution. There is a large cottage industry about the origins of “the rise of the West,” and so on. I am not disputing the particular causal claims made in this literature. Still, I wonder what is being explained. Arguably the potency of the technological platform of “powerful machines plus fossil fuels” was not well understood in advance. Ex post, that it led to the “rise of the modern world” was somewhat of a technological accident. In this sense, studies of the origins of the Industrial Revolution, analytically speaking, are explaining “the Industrial Revolution” (to some extent). But the “sense-reference distinction” matters here. These studies are not so much explaining “the rise of the modern world,” which is more of a technological accident than we might wish to think.
Third, there remains the issue of unmeasured gains in real wages. Let’s try a simple thought experiment. Say I’ve been at George Mason twenty years (much less since 1973) and my real wage had never gone up (not the case). But my Dean were to say to me: “Tyler, U.S. health care has some new procedures, when you’re 73 you’ll have stents, and now can surf the internet and watch reruns of Battlestar Galactica. We’ve treated you very well!” Such a claim would not pass the laugh test and few people would accept it as applied to their own employment relation. Yet many of those same people make this same argument in the aggregate. I still think that if measured real wages for a group (or individual) have not gone up very much, over a long period of time, something is wrong. Wrong with the Dean, wrong with me, whatever, but something is wrong. Who would have predicted in 1972 that measured male median wages were going to stagnate and even possibly fall? You should be shocked by this result and indeed I am.