Results for “best book”
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Cow [Vache]

Nobody leads the cow
To the greenery cropped and dry
To the greenery without caresses,

The grass which receives it
Must be sweet as a silken thread,
A thread of silk sweet as a thread of milk.

Ignored mother
For the children it is not lunch,
But the milk on the grass
The grass before the cow,
The child before the grass

That is by Paul Eluard, translated by Ted Hughes.  I’ve still been very much enjoying Letters of Ted Hughes

Elsewhere in the world of fiction, I found the "philosophical" European bestseller The Elegance of the Hedgehog precious and unbearable; I couldn’t get to page 30.  The new John Updike novel, The Widows of Eastwick, has been mostly panned, but I agree instead with this very positive NYT review.

Paul Krugman wins the Nobel Prize

He is cited for trade theory and, appropriately, location theory and economic geography.  He could have been cited for his work on currency crises as well.  Here are the most basic links on Paul, it is hard to know where to start.  I have to say I did not expect him to win until Bush left office, as I thought the Swedes wanted the resulting discussion to focus on Paul’s academic work rather than on issues of politics.  So I am surprised by the timing but not by the choice.

Here’s Krugman’s NYT column from today; there is so so much on him and by him.  Here is his blog.  Here is a short post-prize interview.  He has been influential in pushing the United States toward a bank recapitalization plan.  Here is Krugman on video, from just the other day, talking about the crisis and how bad it might get.  Krugman, of course, also called the housing bubble in advance.

Krugman is very well known for his work on strategic trade theory, as it is now called.  Building on ideas from Dixit, Helpman, and others, he showed how increasing returns could imply a possible role for welfare-improving protectionism.  Krugman, however, insisted that he did not in practice favor protectionism; it is difficult for policymakers to fine tune the relevant variables.  Boeing vs. Airbus is perhaps a simple example of the argument.  If a government can subsidize the home firm to be a market leader, the subsidizing country can come out ahead through the mechanism of capturing the gains from increasing returns to scale.  Here are some very useful slides on the theory.  Here is Dixit’s excellent summary of Krugman on trade.  Krugman himself has admitted that parts of the theory may be less relevant for rich-poor countries trade (America and China) rather than rich-rich trade, such as America and Japan.

I am most fond of Krugman’s pieces on economic geography, in particular on cities and the economic rationales for clustering.  He almost single-handedly resurrected the importance of "location theory," an all-important but previously neglected branch of economics.  Here is the best summary piece of Krugman’s work in this area.  I believe this work will continue to rise in influence.

I have my own favorite pieces by Krugman.  This include his short critique of Austrian trade cycle theory and his short piece on why the British had such bad food.

He is also, by the way, a loyal MR reader but he is not the first reader to win the prize.

Krugman’s books:

Here is my review of Conscience of a Liberal.  That book argued that politics and policy can reshape the distribution of income in a more egalitarian direction.  Peddling Prosperity is one of the best-written economics books, ever, as are also The Age of Diminished Expectations and Pop Internationalism.  The latter started a trend of Krugman as a debunker of erroneous economic claims.  The supply-siders and the low-level industrial policy advocates were early targets of his pen.  Pop Internationalism is also the work of Krugman’s most likely to be popular with market-oriented economists.  Here is a collection of Krugman’s earlier writingsThe Great Unraveling — circa 2004 — is for me too under-argued.  His book Currencies and Crises is in my view his most underrated work; it provides a very readable introduction to some of his ideas on financial crises and it has a nice use of the concept of option value.  Development, Geography, and Economic Theory is a very good and very readable introduction to his work on economic geography.  That and the currency book are my two favorites by Krugman.  Geography and Trade is useful plus here is a more technical collection on the spatial economy.

Krugman has a widely used Principles text, co-authored with his wife Robin Wells.  He also has a leading text in international economics co-authored with Maurice Obstfeld.

Here are profiles and bio pieces, none very recent.  Here is Krugman on how he works — very personal and insightful.  Some of Krugman’s thinking on the liquidity trap — a key issue today for the crisis — can be found here.

Krugman of course is a controversial figure in the blogosphere and in politics but I believe for today it is best to set those issues aside.  His Wikipedia page has lots on the critics plus some bio as well.  Daniel Klein for instance argued that Krugman should do more to speak out for freer markets in various settings.

Krugman’s early columns for Slate.com were an important model for shaping what the econ blogosphere later became.  They are models of clarity and rigor which we all would do well to emulate.  His exposition of Ricardo’s theory of comparative advantage is remarkably good and it is one of the best pieces of popular economics writing I know.

Award analysis: This was definitely a "real world" pick and a nod in the direction of economists who are engaged in policy analysis and writing for the broader public.  Krugman is a solo winner and solo winners are becoming increasingly rare.  That is the real statement here, namely that Krugman deserves his own prize, all to himself.  This could easily have been a joint prize, given to other trade figures as well, but in handing it out solo I believe the committee is a) stressing Krugman’s work in economic geography, and b) stressing the importance of relevance for economics.  Daniel Davies also sees it as a career-based award. 

Who are the big losers?  Avinash Dixit and Elhanan Helpman and Maurice Obstfeld have to feel their chances for the prize went down significantly.

Addendum: Here is Bryan Caplan on "Paul Krugman, Guilty Pleasure."

Fruitless Fall

The subtitle is The Collapse of the Honeybee and the Coming Agricultural Crisis and the author is Rowan Jacobsen.  Many books on biodiversity have bad economics but this book has very good economics:

Sometimes the fraud is chemical, as when rice syrup is doctored to resemble honey, and sometimes it’s ontological.  For instance, what is honey?  If you answered something like "a syrup made entirely out of nectar by bees," then consider yourself hopelessly out-of-date.  Let me introduce you to "Packer’s Blend," the latest offering from China.  It appeared on the market in 2006, shortly after the bond-posting loophole was closed by Congress.  Chinese honey may be subject to tariffs, but if a product is less than 50 percent honey, it isn’t covered by the law.  This "funny honey," as beekeeprs call it, is between 40 and 49 percent honey.  The rest is syrup; corn syrup, but also rice syrup, lactose syrup — whatever’s on hand and cheap.  The importers who bring in these blends may sell them to manufacturers as blends or as pure honey, adding some nice American or Canadian clover honey to give the blend a semblance of the real thing and get it past the manufacturers.

This book also offers a thoughtful analysis of the dangers facing biodiversity, a fascinating look at what Gordon Tullock called "the economics of insect societies," and a revision of Steven Cheung’s "Fable of the Bees" (the story now involves almond growers in a major role).  It is one of the best popular science books I have read in the last few years.

George Halverson on health care reform

Ah, remember that topic?  Ezra Klein does.  The book is called Health Care Reform Now! and the author is CEO at Kaiser Foundation Health Plan.  That may not sound like an encouraging combination but in fact this is one of the most intelligent health care policy books around.  The analysis of cost inflation, lack of early care, and billing for procedures is perceptive throughout.  The policy proposals involve electronic medical records for everyone, legally required health insurance, enforcing that mandate through the tax system (will he really cut off EITC to kids?), high-deductible plans for the high-income insured, covering some of the uninsured through an expansion of Medicaid (expand SCHIP and cover the single poor), offering primary care-first health insurance plan to the remaining poor uninsured, and finance the whole thing through a health care sales tax.  I like that last part best of all.  Plus he wants to reform the entire infrastructure of health care and institute more pay for performance.

I’m puzzled as to how he avoids destructive "notches" (implicit high marginal tax rates) across different individual margins and what private insurance companies will do with perfect access to everyone’s electronic health care records.  And he doesn’t focus enough on encouraging innovation or dismantling bureaucracy and barriers to entry.  Still, this is one of the most substantive books out there on health care economics.  Recommended to anyone who might be tempted.

Addendum: I’ve now read through the comments and I have to admit I am a little disappointed.  I don’t favor Halverson’s solutions overall though I do favor a much greater role for integrated HMOs.  The more important point is that I should be able to cover a book, and discuss its virtues, without having to come down on it, or for it, in a partisan way.

Net worth certificates, from the FDIC

One alternative is a "net worth certificate" program along the lines of
what Congress enacted in the 1980s for the savings and loan industry.
It was a big success and could work in the current climate. The FDIC
resolved a $100 billion insolvency in the savings banks for a total
cost of less than $2 billion.

Here is more.  Here is an FDIC summary of the program, under the heading "Other Resolution Alternatives."  To the extent bank recapitalization is needed, this is the best way to do it.  As Andrew Sullivan will tell you, experience really does matter.  I would like to see more economists promote this idea as an alternative to Treasury warrants. 

Another modest proposal

This one is even more modest than the last.

Let’s say you have ten banks and two of them are insolvent.  But you don’t yet know which two.  So the credit market is messed up for all ten because at some sufficiently high level of risk credit just shuts down.  The goal then is to reveal which two of the ten banks are insolvent.

I’ve been thinking of all those old puzzles where a bunch of guys enter the room and only so many of them have smudges on their foreheads and you have to find the algorithm to reveal that information.

What can be done?  Temporarily allow insider trading, with short selling of course?  (Bryan Caplan’s idea)  Make executives either resign or post personal bonds, where default of the bond follows if the bank ends up insolvent?  Change laws and make banks exhibit their books to the public and let traders sort it out?

I don’t know.  But maybe sorting out the bad banks is one alternative to finding and isolating the toxic assets.  Because once all the remaining banks are good and known to be good, the problem of toxic assets no longer seems so paralyzing.

I’m still not sure that the Treasury buying bank assets is to best way to make this sorting, and that’s leaving aside the price tag.  In fact maybe Treasury buying postpones this revelation of information.

Of course if eight of the ten banks are bad, maybe we don’t even have the luxury of asking these questions.

The regulation of derivatives

Be wary when you hear talk of "derivatives" without further qualification.  They fall into three quite distinct categories: exchange-traded, over the counter (OTC), and swaps.  Here is the best overall paper I know on that division.  Wikipedia is useful as well.

I’ll cover swaps in a separate post soon, so for now let’s set those aside.

Exchange-traded derivatives include the instruments traded at the Chicago Mercantile Exchange and The New York Stock Exchange.  Their regulation has overall gone well and no one serious has alleged that they are responsible for our current financial problems.  That said, a single regulator is preferable to our current dual SEC-CFTC structure.

Most but not all OTC derivatives are interest rate derivatives.  Equity derivatives fit this category as well and so do credit default swaps (even though they are called "swaps" they do not here fit into the swaps category). 

These instruments are OTC because no clearinghouse in the middle guarantees the deal.  That means more credit risk and that no single middleman is tracking net positions on a more or less real time basis.  Ideally we would like to make OTC derivatives more like exchange-traded derivatives and we should consider regulation toward that end.  (Do note that private swaps regulators have already done quite a bit to
clear up the issue of hanging and unconfirmed transactions.)  At the margin the social benefits of such homogenization are higher than what the private swaps regulators will bring on their own accord.  In essence homogenization and trading through a clearinghouse limits the leverage issue to a single, easily-regulated institution and therefore it limits the problem of counterparty risk.

The cost of such additional regulation will be higher transactions costs for the trades themselves and also greater contract homogeneity, which is a requirement for exchange trading, netting, and clearing.  We need to make this move wisely and carefully, otherwise OTC derivatives could move to even wilder and less well regulated markets.  Simply trying to shut down the OTC markets, even if that were the economically ideal vision (unlikely), would in terms of risk prove counterproductive.  But the strong market positions of New York and London do make some effective regulatory action possible for OTC derivatives, especially if done in concert.

The lack of sufficient offset and netting and the inefficient spread of counterparty risk across a large number of institutions is an important issue behind current crises and it does not receive enough attention in most blogosphere discussions.

How about Europe?  The 2006 Markets in Financial Instruments Directive extends traditional European financial regulation to OTC derivatives.  Here is one source: "MiFID expands the definitions of financial instruments to include other frequently-traded instruments, including contracts for difference (CFDs) and other types of derivatives such as credit, commodity, weather and freight derivatives."  Here is one overview of MiFID

Implementation and enforcement is on a country-by-country basis and of course the UK is the big player.  Read pp.27-29 in the very first link above and you’ll see that overall the UK has a looser regulatory approach than does the United States, though not on every single matter.  For instance the UK is stricter on regulating hedge funds in OTC derivatives markets.

The more important point is that no country uses regulation of the derivatives market as its major line of defense against financial crises.  Rather countries regulate their financial institutions, their risk, their leverage, and their accounting directly, of course with more or less success.  Regulating the derivatives market, as opposed to regulating the institutions, and their possible participation in those markets, simply isn’t a very effective instrument.

To sum up: a) we should regulate OTC derivatives more, b) those regulations should aim toward establishing netting and well-capitalized clearinghouses, not micro-management of those markets, which would prove both impossible and counterproductive, and c) regulating OTC derivatives is only a weak substitute for regulating the institutions which trade in them.

The U.S. passed the Commodity Futures Modernization Act of 2000, which, among other things, limited the ability of the federal government to regulate OTC derivatives.  I’ll cover that Act in a separate post and yes I do think it should be amended.  But I’ll start by saying that most blogosphere critics of the act simply do not know or understand much of the above.

A defence of the Paulson plan

It’s always worth hearing from both sides, in this case Nadav Manham:

This [the purchases of the Paulson plan] has the effect of modestly increasing the stated book value of
these financial institutions.  More importantly, with the toxic waste
off the books, it improves the likelihood that an outside
investor–Treasury itself, a sovereign wealth fund, even our man in
Omaha–now feels able to value the enterprise.  Hold your nose and
admit it:  the relatively few franchises that manage the capital
raising and M&A activities of Corporate America are worth a lot.

3)
Said outside investors collectively have enough capital to recapitalize
the major Wall Street insitutions via injections of new equity.  Here
comes the tricky part: In exchange for their largesse, both the outside
investors and Treasury (e.g. via warrants struck at the same price as
the outside investor) must be allowed to invest on very favorable
terms.  In a perfect world existing equity holders and stock options
would be essentially wiped out, a la AIG.  In an even more perfect
world, existing debt holders (i.e. unsecured lenders to Morgan Stanley,
Merrill, etc.) would also take a big haircut, just as they usually do
when corporations declare bankruptcy. 

4)  Both liquidity and
solvency are restored, credit starts to flow again, and the downward
spiral of asset sales is prevented, allowing whatever pain will occur
to occur over time, and to be spread widely.

…as far as I can tell, the plan does not specify when Treasury
is obligated to buy toxic assets, nor does it prevent Treasury from
doing another AIG.  Conceivably it could wait until the maximum moment
of pain to get the best price possible for its assets.  Or it could
continue to do AIG-style bailouts followed by purchases of the toxic assets, in a sense bailing out itself.

There is more at the link.  A key assumption here is that jump-starting liquidity for bank assets is a big part of the cure; having the government dilute bank equity, as the Elmendorf plan suggests, does not on its own achieve this end.  I do find this a reasonable view, though as Paul Krugman points out it is unlikely that it is only a liquidity issue.  The implicit belief here is that resolving the liquidity issue is needed to make progress on the solvency issue.  Maybe.  But still I do not like the Paulson plan.  It reminds me of everything I dread about unchecked power and the administration’s score on this question is very, very bad.

…are doomed to repeat it

Systemic risk can render drastic action necessary.  But what about the prospects for the long term?  Will they truly look up?  David Leonhardt writes:

The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz – who runs an equity research firm in New York and
writes The Big Picture, one of the best-read economics blogs – is going
to publish a book soon making the case that the bailout actually helped
cause the decline. The book is called, “Bailout Nation.” In it, Mr.
Ritholtz sketches out an intriguing alternative history of Chrysler and
Detroit.

If Chrysler had collapsed, he argues, vulture investors
might have swooped in and reconstituted the company as a smaller
automaker less tied to the failed strategies of Detroit’s Big Three and
their unions.

…Speaking of which, Detroit’s Big Three have come back to Capitol Hill
lately, lobbying for billions of dollars in handouts. This time, their
executives insist, they’ll use the money to solve their problems.

Dailynewslg

The worst case scenario?

My take on the B of A buyout is that Hank is piling up all the ****
into one huge **** on B of A’s books so that when they go under it is
clearly too big to fail and can be handled in one fell swoop.

That’s from a comment at calculatedrisk.blogspot.com.  That view is an outlier, but it’s always worth knowing the worst case scenario.  At least it explains why B of A is interested in such a hasty deal with a losing business partner.  Here is Paul Krugman’s column.  Here is Felix Salmon on the unlucky Damien Hirst.  Arnold Kling outlines the best case scenario, which is right now a better forecast than the worst case scenario.  On another front, maybe Lehman bonuses will be clawed back.

Magnus #1?

17 year old Magnus Carlsen won a chess game today and is probably now, unofficially, ranked #1 in the world.  (World champion Anand lost and fell behind in rating points.)  Here is an illuminating recent profile of Magnus.  I believe Paul Samuelson is the closest to an economics prodigy we have had.  He was thirty-two when his Foundations of Economic Analysis was published but I have heard that he wrote the book at a much earlier age (does anyone know the exact age?).  He was probably one of the best economists in the world when he received his undergraduate degree at Chicago at the age of 20.  Frank Ramsey is another example of an economics prodigy although he didn’t even think of himself as an economist per se.  Can you think of other prodigies in mathematical economics?  I attribute their scarcity to the relative aesthetic poverty of mathematical economics (for most people it’s not that fun or beautiful) rather than the need for complementary experience-acquired wisdom.  Do you agree?

Addendum: Andrew Gelman considers statistics.

My Favorite Things Alaska

All this attention is being devoted to Alaska, so I thought I should do my own evaluation.  Note in advance that politicians don’t usually make these lists, they’re not "favorite" enough for me.  And enough about her for now anyway (though I’ll note in passing, in response to Andrew Sullivan and others, that if voters want to like her, they’ll simply refuse to see McCain in the properly cynical light); but no more comments on this issue for now as I want the blogosphere back!

1. Novel, set in: Jack London’s Call of the Wild or White Fang are the obvious choices.  Did you know that London’s fiction was very widely read in the former Soviet Union?

2. Music: There’s Jewel and Bette Midler and maybe you’re all wondering which one I will pick.  But the excellent Kevin Johansen, also associated with Buenos Aires I might add, is the proverbial rabbit from the hat.  Ha! 

3. Movie, set in: Both Never Cry Wolf and Grizzly Man are very good; the former had a lead character named Tyler before the name became fashionable.  And isn’t Nanook of the North set in Alaska?  Into the Wild is another pick and I doubt if I have exhausted the list.

4. Basketball player: Carlos Boozer is from Juneau.

5. Sculpture: Alaska is probably #1 in the entire United States once you consider the indigenous peoples.  The best works are from the 1950s and 60s and they are not always attributable.  My personal favorite is Thomassie Annanok but of course that is a matter of taste.  Ingo Hessel’s book on Inuit Art is a favorite of mine, noting that it focuses more on Canada than Alaska.

6. Other arts: The Tlingit (some of whom live in Canada) have excellent totem poles, boxes, and carvings.  The Haida are another rich artistic tradition.

7. Novel, set in: Michael Chabon’s The Yiddish Policeman’s Union is the obvious pick plus I hear The Cloud Atlas (The Liam Callanan book, not the David Mitchell one, which is very good but not connected to Alaska) is good.

8. Travel book, set in: Jonathan Raban’s Passage to Juneau: A Sea and its Meanings is lovely.  I’ve never read John Muir’s Travels in Alaska but it is likely a contender.

9. Blogger: Hail Ben Muse of Alaska, advocate of free trade!

The bottom line: It relies too much on "set in," but overall the list is better than I had been expecting.  Sadly, Alaska is the one American state I have yet to visit.

Assorted links

1. Why don’t all peoples form neat, orderly lines?

2. Japan will label carbon footprints for many items

3. Charles Mann, on our eroding supply of dirt and the economics of soil.  I am a big fan of Mann (he wrote the superb 1491) and this is one of the best magazine pieces of this year if not the best.  On top of all the good economics in this piece, learn how the "black revolution" — putting carbon in the soil — may solve agricultural problems and alleviate global warming at the same time.  Hat tip to Kottke.

4. The latest: "Chile’s lower house of congress has suspended plans to boost a $1,626 gasoline subsidy for each of its members."

5. Vegan-libertarian debate and discussion

6. The new Neil Stephenson book

My favorite things Chile

1. Fiction: I’ve already covered Roberto Bolaño plenty on MR; The Savage Detectives is his masterpiece but it’s all worth reading.  The massive 2666 is due out later this year.  José Donoso’s The Obscene Bird of Night, while hardly read in the U.S., seems to me one of the most gripping novels of the 20th century.  If you read the Amazon reviews you’ll that others who have read it agree.  This is one of the least read first-rate novels I know.  It’s not easy going, however, and it’s taking me a long time to read through a mish-mash of the English and Spanish-language texts.  To top it all off, Isabel Allende has many fun books, most notably The House of the Spirits, which almost everyone will enjoy.  Chile is much stronger in literature than most people think.

2. Popular music: Ricardo Villalobos is the lead figure of Chilean techno, which is now I hear quite a vibrant genre; Taka Taka is quite a good mix album.  What else can you point me to?

3. Poetry: My favorite Neruda is Canto General, his retelling of Whitman’s America but covering the entire hemisphere.  A masterpiece.  Estravagario is excellent and while I haven’t read Residencia de la Tierra, it is considered another one of his classics.  The love poems are very nice though perhaps not his best material.  In any case he is one of the three or four best poets of the twentieth century.  Gabriela Mistral is talented but I cannot say I love her work.

4. Playwright: Ariel Dorfman’s Death and the Maiden is good.

5. Favorite small town: There are so many, but how about Villarica, Punta Arenas, or that small port place next to La Serena whose name I cannot remember?  Chile is one of the world’s best countries for lovely small towns.

6. Movie, set in or made in: Sorry folks, but I can’t think of a single one.  What am I missing?

7. Seafood dish: Curantos.

8. Pianist: It’s hard not to pick Claudio Arrau, but, despite his musical intelligence, I don’t actually enjoy most of his (to me) lugubrious recordings.  I have heard he was much better live in concert.

9. Painter: Roberto Matta is the obvious choice.

The bottom line: Writing, writing, and more writing.  More generally, Chile is one of the very nicest countries on Earth.  The key is to get around to those small towns.

Against Intellectual Monopoly

Against Intellectual Monopoly is a relentless, pounding, take no prisoners attack on patent and copyright law.  It joins Lessig’s Free Culture and Heller’s The Gridlock Economy as an instant classic and a must-read on these issues. 

Many people argue that the patent system has gone wrong in recent years, Boldrin and Levine argue that the patent system was rotten from the start.  James Watt they say was a "scoundrel" who with his politically-connected partner Matthew Boulton used the patent system to crush their innovative opposition and delay the industrial revolution. 

During the period of Watt’s patents, the United Kingdom added about 750 horsepower of steam engines per year.  In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year.  Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; however between 1810 and 1835 it is estimated to have increased by a factor of five.

Will books be published without copyright?  Boldrin and Levine point out that the 9-11 Commission Report was profitably published by Norton despite being available free for download. Not to mention the fact that most of the great works of literature were published without copyright.  Boldrin and Levine are top-notch theorists but AIM is widely accessible and it succeeds best with its many historical discussions and contemporary anecdotes.

AIM does suffer in places from a lack of a lack of nuance and a surprising ability to ignore trade-offs.  Boldrin and Levine argue, for example, that among the reasons we don’t need patents are a) because ideas aren’t copied immediately, they take time to diffuse, b) first movers have significant advantages and c) trade secrecy is often a more effective "means of appropriating returns" than patents.

Quite right on all three counts but each of these reasons also explains why patents are less costly than one might at first imagine.  After all, what Boldrin and Levine are really saying is that intellectual monopoly would exist even without intellectual property law

A standard model used to explain why patents might be useful implicitly
assumes that ideas are transmitted instantly at zero cost.  Boldrin
and Levine smash the premise of this argument but the premise is sufficient for the conclusion not
necessary.  Indeed, once you acknowledge that the slow diffusion of ideas helps entrepreneurs to appropriate the returns to their innovations it becomes an open question of how slow is best?   When is the appropriability of returns strong and when is it weak?  Doesn’t it differ for different goods?  Shouldn’t intellectual property law recognize these differences?  It’s clear, for example, that ideas are diffusing more quickly than ever before.  On Boldrin and Levine’s argument, faster diffusion of ideas implies lower appropriability and thus a stronger argument for intellectual property law.  Needless to say Boldrin and Levine are too busy using
a "mallet to smash shiny myths" to make this argument.  (To be fair, they are more nuanced in
the conclusion.).

Similarly, Boldrin and Levine argue that the larger the market the less patent protection is needed, hence globalization implies less patent protection.  Again, quite right (see also my paper, Patent Theory versus Patent Law, on this point).  But you won’t see Boldrin and Levine drawing the corollary conclusion that more intellectual property rights are optimal the smaller the market, despite the fact that we have a very successful example where increased patent rights for smaller markets generated considerably more innovation, namely the Orphan Drug Act.

For economists, it’s also surprising how little marginal analysis you find in AIM.  For example, Boldrin and Levine ask, Did Rowling really need a billion dollars to write Harry Potter?  Surely, a few million would have been enough.  But that’s like saying that taxing lottery winnings won’t reduce the number of buyers because the winner will still get a huge return on her dollar of investment.

The bottom line is that that there is a Laffer curve for innovation – more appropriability increases innovation at first but innovation declines when appropriability extends too far. I agree with Boldrin and Levine that rent-seeking has put us on the wrong side of the Laffer curve for innovation.  We need to reduce intellectual monopoly with patent reform, less copyright protection, and a greater use of patent substitutes like prizes.  But unfortunately, when it comes to innovation there is no invisible hand theorem which moves us automatically to the top of the curve.