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Rodrik's trilemma is just a rephrasing of the impossible trinity:
http://en.wikipedia.org/wiki/Impossible_trinity

Get rid of the fixed exchange rate, and his trilemma disappears.

There is no fixed exchange rate, or fixed interest rates in the EU.

#2 raises something that I've struggled with for some time.

The fact is, the way we've chosen to structure businesses, means that most valuable innovations generate few rewards for their actual inventors.

Ask yourself, which Toyota engineer or engineers made millions for creating a genuinely salable hybrid car? And yet, there are at least a few really clever innovations that went into it. Similarly, when was the last time a process revolution in a manufacturing plant or foundry made millions for the guy who came up with it? And yet, we are vastly more productive in manufacturing and steel making today, than we were 10 or 20 years ago.

Some clever guy at Qualcomm designed the dual band chip that made the new iPhones possible, some engineer at Foxconn came up with an idea that shaved $5 off the iPad, but they are paid a salary to do so, and rarely reap anything close to the actual market value of their innovation.

In relatively mature industries, we pay R&D scientists and engineers to innovate, and reap the benefit of their often staggeringly innovative solutions. Only in software, and perhaps some parts of healthcare do innovators have the ability to monetize their invention fully. Thus it is not surprising that only trivial/marginal innovations seem to make a lot of money for their innovators. Its only the "easy" ones, for the most part, that can be monetized significantly by their inventors.

Now if you agree with this thesis, its an interesting question to try and figure out if there is a policy solution to this. Is there a way to reward genuine innovators for their innovations? It seems hard to believe that we aren't losing talented people who could be innovating at Shell or Alcoa or Toyota, but who chose not to, because the reward for doing so isn't as big as the reward for coming up with the next Instagram.

I'm not trying to claim that we ought to glorify engineers and R&D scientists, but the fact is that it is harder and harder in most industries to trace a really clever innovation to a small group of innovators.

My policy suggestion is prizes. Companies have few incentives to lavishly reward innovators - they often are building on the work of their peers, and frankly, the company has already received the value of their effort, it is not likely that they will generate multiple breakthroughs. However there is value for society in ensuring significant innovators are lavishly rewarded. Why not give out $50M in prizes every year to 20 breakthrough innovators? The tax burden is small, but the value to society tremendous.

Prices are a bad idea. The reward goes not to the best idea in the market but to the best idea in the political idea. You will see a lot of unmarketable, terrible clean-air projects for example.

Even if you have the prizes given by a committee of supposedly neutral peers? I feel that those with scientific training are less apt to be corrupt in that sense, having been indoctrinated about the integrity of research and all.

Or else make targeted prizes for specific inventions.

Its not that they are corrupt. Its that they are clueless.

"Or else make targeted prizes for specific inventions."
This is already being done, for xprize and for darpa. But its the company, not the inventor that gets the prize.

Maybe the innovations are being priced already. The highest wages in the US are in the innovative industries, non innovative sectors have lower pay, generally.

There are also other factors. One could list firms that had innovations to no end but were unable to monetize them due to mismanagement. So the innovations were only valuable due to the management structures that made them valuable.

I don't doubt that the innovations are being priced in, insofar as companies are paying for the marginal value of R&D/engineering effort. The point is that there is a social value that is not being priced in, that of visibly rewarding major innovators for their innovations.

The goal is to shed light on the amazing innovations that have and continue to happen in many mature industries, that reduce cost, and optimize processes, but aren't seen as visible innovations because they are 1). hard to understand 2). inaccessible to most 3). in the best interest of employers to minimize the individual contribution. GE wants to talk about the clever innovation that GE came up with, not what the really smart aerospace engineer invented.

The prizes I propose are after the fact awards, not incentives to promote any particular kind of innovation. Instead, lets get a bunch of smart people to nominate people in industry, academia etc. who have come up with a really clever innovation, in the style of the classic innovations (Gilchrist-Thomas process, diesel engine etc.), assess them based on ingenuity and economic impact and reward them for it. The signal alone would be valuable even if the money doesn't work as direct incentive.

What is interesting though is that most commentators seem to focus entirely on structural reasons why such a prize will never be instituted (misaligned incentives etc.). I don't see a lot of objections to the idea itself (which is heartening).

"2. Do our innovators traffic in trifles?"

Yes, because thats where the low regulatory barriers to entry are. If you want more serious innovation, remove the regulatory barriers to entry.

regulatory barriers to entry in making a better car? or a better computer chip? or a better steel process?

No, it's because in software, start up costs are low. It's a much less capital intense field than manufacturing or hardcore R&D. Now, human capital on the other hand...

And to think we're channeling it to "useless" gadgets. But the great free market has decreed it, so we must abide.

Rodrick's Trilemma is contradicted by the US experience from 1780's to the 1860's.

Right. His formulation of "deep economic integration, democratic politics and autonomous nation-states" is something I haven't seen before. Is he just trying to say it in simple words?

The usual one is "free movement of capital, independent monetary policy, and stable exchange rates". And (if I understand these things right!) the US counter-example you quote is only against his formulation, because the democracy involved did count manipulation of interest rates among its duties.

"the US counter-example you quote is only against his formulation, because the democracy involved did count manipulation of interest rates among its duties"

This is incorrect. Manipulation of interest rates wasn't handled by the US government until the 20th century.

Read the smartest two young macroeconomists' paper on this from only a few days ago: https://dl.dropbox.com/u/125966/trilemma.pdf

"We lay down a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls. We provide sharp analytical and numerical characterizations for a variety of shocks. We find that capital controls are employed to respond to some shocks but not others. They are particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a particular country. We also discuss how the solution depends on the degree of nominal rigidity and the openness of the economy. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or if wages, in addition to prices, are sticky. Finally, we compare the single country’s optimum to a coordinated world solution. Our results show a limited need for coordination. However, the uncoordinated solution features the same capital controls as the coordinated solution."

Touche Professor Kahneman :
"Economists have a mystique among social scientists because they know mathematics. They are quite good at explaining what has happened after it has happened, but rarely before. I don't think of myself as an economist at all."

My policy suggestion is prizes.

Prizes are good. But I suspect there is a fundamental hostility toward objective prize awards among the “philanthropy” toadies due to the fact that they get their personal payoffs from being gatekeepers to the purse strings of the funds. Moreover, when you put prize awards up for grabs by “the best man” you make it possible for men like Henry Ford (Guggenheim Trophy) and Charles Lindbergh (Ortiz Prize) to make an impact on society and that can be _very_ embarrassing to certain kinds of people. There is this problem with fair contests — fair people win them.

Basically the richer the entity the more it should rely on prize awards rather than “picking winners”. Of course, if you look at the wealthiest entity of all (in terms of monetary power) the US Government, they should basically be doing no funding of technology — rather simply putting up prize awards for various objective metrics if they insist on doing that sort of intervention at all (which it isn’t clear they should). They, of course, used prize awards extensively before WW II but after WW II the prize award ethic fell by the wayside.

The richest individuals of course have enough contacts with the government that they could fix this in a jiffy but they don’t — because of their own degeneracy.

The elites can’t really set up large prize awards because they really are aware at some level that they have usurped power and that fair contests would show the real winners to the world. That’s why it took an Iranian-American family to fully fund the X-Prize. The idiot elites-that-be would rather free-ride technological civilization itself down. Let us hope they don’t take the biosphere down along with it.

The "trilemma" exists independently of the problems of the Euro which arise from the dicision to persue "deeper integrtion" by measns of a common currency, whihc is neither necessary nor sufficient for integration.

5. yep, that top 1% is just full to the brim with people with programming and applied math skills--the spectacular 'alternative' explanation that just can't seem to gain traction. i suppose the other interpretation of his story is that we "retrain" people to become corporate suits, which is what the 1% is actually made of, although then i'm not sure what 'skills' that retraining should impart, except perhaps to learn to be white, male, have a harvard business degree, and lobby the government for special tax exemptions and tbtf status.

Many people now say they knew a financial crisis was coming, but they didn't really. After a crisis we tell ourselves we understand why it happened and maintain the illusion that the world is understandable. In fact, we should accept the world is incomprehensible much of the time.

Probably true. But the problem I have with it is that he is writing in the Guardian. Where a lot of people do not understand a great many things. This may justify their attitudes. They may think they do not need to grasp the basics of economics because, you know, it is all so hard and stuff. Whereas we can say one thing with some confidence - we may not know how to run an economy perfectly, but we know lots of ways to run them really badly. Putting anyone who reads the Guardian in charge for instance. Not all forms of ignorance are equal. Some really are worse than others.

Motives are rarely straightforward. When the war started my father was chief of research for a company that was part of L'Oréal in Paris. The owner of L'Oréal was also a main funder of the fascist party in France, and antisemitic. But he protected my [Jewish] father during the war when he was taken by the Nazis.

I can think of several straight forward reasons why this might have happened. Why assume the complex when the simple will do?

Why is the price of Irish bonds suddenly down from over 6% to almost nothing? Overnight? That's the implication of a chart I saw. Has Ireland really recovered that fast, or perhaps the data was stale and from their crisis of last year?

Maybe its the result of the end of Libor manipulation? Could the manipulation have had slipover effects?

The other option is that Tyler and you guys are wrong, and that these things aren't useless but are world-changing. I know facebook and instant messaging and SMS changed my life... I don't know about you guys.

Yeah, that was my response.

I'm fairly sure that in 1700, when national wealth and power depended on wooden sailing ships and grain farming done by hand, you would have people scoffing at the waste in developing mechanical "toys".

I agree with you that we're looking at this backwards. Yes, there are less "trivial" problems we could be focusing on. But for those in the game, turning away from such lucrative innovations (however minor) would be foolish. We're in a seeming stagnation not because there's nothing left to create save Pinterest. We're in a seeming stagnation because innovation is accelerating to the point where there are so many simple opportunities to create an Instagram, remix a song, churn out the sequel to a movie, etc. that the less "trivial" problems don't get the attention they perhaps observe. It's the glut of low hanging fruit that's discouraging us from reaching higher.

4. Kahneman reaches a conclusion about return objectives by talking to ONE financial advisor? Most of my clients have an objective of wealth preservation and few want aggressive growth. Those who do want growth don't necessarily want or need active management. 80-90% of returns come from asset allocation and about 5-8% from asset selection. Even if you can gain alpha, it usually comes from relatively moderate tilts.

If Kahneman's advisor doesn't want more clients, I know many FAs who would love to work with such a client. That FA probably wants a client who doesn't mind paying high fees for pretending to create alpha.

#4. Kahneman sounds witty and all that but he is still a guy who rode to fame on pure sleight of hand bullshit like Linda the bank teller. So I can't take him seriously no matter what he says. The guy is a con.

People often object to that example, particularly to some of the worst presentations of it in the popular press, but there is a lot of really good research that he & Tversky did. How our brains work and what effect tricks or "sleight of hand bullshit"* have is quite worthwhile to know.
*One of the most important things he has researched is "priming effects". These have an effect even when the subject is explicitly told that the priming is irrelevant and should be ignored.

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