Friday, October 05, 2012

Acemoglu and Robinson versus the blogs


Daron Acemoglu and James Robinson have a paper out (with Thierry Verdier) about different "flavors" of capitalism and how these  flavors could affect innovation. Specifically, they compare the "cuddly" capitalism of Europe to the "cutthroat" capitalism of America. First they make a simple mathematical model to show how more socialist "cuddly" countries like Sweden can act as parasites, leeching off of the innovations produced by the freewheeling "cutthroat" nations. Then they "test" their model by showing that the U.S. patents more stuff than Scandinavian countries.

This paper drew criticism from a number of bloggers. For example, here Lane Kenworthy asked: 1. What about alternate measures of innovation in which Scandinavian countries score close to the U.S.?, and 2. Wasn't the U.S. more "cuddly" back in the 70s, and weren't we just as innovative back then? And here, Matt Yglesias alleged that patents are a crummy measure of innovation.

Acemoglu and Robinson then defended themselves on their blog. After suggesting that criticism of their paper was motivated by politics (buncha commie bloggers!), Acemoglu and Robinson discuss what they believe to be the differing roles of blogs and academic research:
[There is a] divide between what the academic research in economics does — or is supposed to do — and the general commentary on economics in newspapers or in the blogosphere. When one writes a blog, a newspaper column or a general commentary on economic and policy matters, this often distills well-understood and broadly-accepted notions in economics and draws its implications for a particular topic. In original academic research (especially theoretical research), the point is not so much to apply already accepted notions in a slightly different context or draw their implications for recent policy debates, but to draw new parallels between apparently disparate topics or propositions, and potentially ask new questions in a way that changes some part of an academic debate. For this reason, simplified models that lead to “counterintuitive” (read unexpected) conclusions are particularly valuable; they sometimes make both the writer and the reader think about the problem in a total of different manner (of course the qualifier “sometimes” is important here; sometimes they just fall flat on their face).
Well, first of all, I disagree with the idea that counterintuitiveness is inherently good when evaluating academic research; growing up, I argued this point at length with my dad, who is a cognitive psychologist. But this is neither the time nor the place for that argument.

Instead, I want to make two points.

First, I want to point out that Acemoglu and Robinson's theoretical result is not very counterintuitive. The notion that there is a tradeoff between innovation and redistribution is quite a commonly-held belief. In Acemoglu and Robinson's theoretical model, this ideas is a built-in assumption; is is not the result of the model, it is the model's starting point. To see this, just check out Section 2.2 on "Reward Structures". The authors assume that the reward to entrepreneurship (entrepreneurs are the same as innovators in their model) depends on the degree to which a country lets winners win and lets losers lose. The entrepreneurs decide how much effort to put out - if they try harder, they have a bigger chance of succeeding.

To my knowledge - and if I am wrong, please correct me! - this reward structure and this "return to effort", are not taken from any microeconomic study of entrepreneurial behavior; they are just something the authors wrote down.

Why did they write them down? A cynic would say: "Because these assumptions made the model work out the way the authors wanted it to", but I am not such a cynic. Instead, it seems to me that they wrote down these assumptions because they were intuitively plausible. It makes intuitive sense that the bigger the risk from losing, the more people will try hard not to end up being losers. And it makes intuitive sense that the harder someone tries, the better they do.

Given these assumptions, the result of the model is not hard to predict - when you let losers lose and winners win, innovators try harder. Not exactly a shocker, given the assumptions.

So is this model counterintuitive? I argue: No. Instead, it is intuitive. It seems to have been built using intuition, and its results confirm commonly-held beliefs about the difference between "cutthroat" and "cuddly" capitalism. So I don't think it makes much sense for Acemoglu and Robinson to defend their research from the bloggers by saying that the purpose of academic research is to be counterintuitive.

OK, time for my second point. Mark Thoma wondered why Acemoglu, Robinson, and Verdier get the result they get. Isn't it true that entrepreneurs have to take a lot of risk? And doesn't that mean that social insurance, which reduces risk, should encourage entrepreneurs to take more risk, not less? How is it that Acemoglu et al.'s model avoids this effect?

Here is the answer: it's built into the math. The authors assume that the only cost of entrepreneurship is effort. From the paper:
We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship[.]
In other words, the authors have assumed away much of the risk of entrepreneurship! A failed entrepreneur gets paid exactly the same wage income as a worker who doesn't try to be an entrepreneur at all! This automatic wage income reduces the risk of entrepreneurship substantially, and makes social insurance much less necessary for reducing risk. 

How realistic is that assumption? Well, in the real world, entrepreneurs in rich countries have limited liability, and can pay themselves wages out of their start-up capital. This means that many entrepreneurs can earn a wage even as they work to start businesses. But this wage is often much less than they could have earned otherwise, and if their business fails (a statistically likely event), they will be unemployed. So the "no occupational choice" assumption probably reduces the risk of entrepreneurship, relative to the real world. 

Also, the authors assume that entrepreneurs do not put up any of their own wealth as startup capital for their ventures, and they assume no heterogeneity between worker/entrepreneurs. This means that it is just as easy - and no more risky - for a poor person to start a successful company as for a rich person to do so.

So to sum up my second point, Acemoglu, Robinson, and Verdier have assumed a model in which:
  • Entrepreneurship is low-risk,
  • Rich people have no advantage over poor people when it comes to starting companies, and
  • Your probability of success depends entirely on how hard you work.
(No wonder liberals were not happy about this model, eh?)

So to combine my two points: When it comes to this kind of modeling, what you get out is pretty much what you put in. If you start off with the intuition that success is a function of how hard you work, and how hard you work is a function of how much the government will let you keep your hard-earned gains - in other words, if you start off with the intuition of pretty much every middle-aged conservative guy in America - then your model will probably spit out the result that countries face a tradeoff between redistribution and innovation...again, fitting perfectly with the intuition of pretty much every middle-aged conservative guy in America.

So the model is not counterintuitive. But is it a good model? Does it help us understand the world? Here we have to turn to the data. The data tell us that America issues more patents than Scandinavian countries. Is that good enough? Even if patents are a good measure of innovation (i.e., if Matt Yglesias is wrong), and even if cross-country comparisons are valid, and even if such a small sample were enough to make a statistical inference, I'd still say we have a problem here. Why? Because Acemoglu, Robinson, and Verdier were almost certainly aware of the patents data before they wrote their paper. It is quite probable that the patenting disparity between the U.S. and Scandinavia is what inspired their paper. And one cardinal rule of scientific theorizing is that your model should be tested on data other than the data used to construct the model.

In other words, Acemoglu et al. have not yet succeeded in explaining anything about the world. They have looked at the world, and then used plausible sounding assumptions to create a model whose results fit what they observed. But they have not yet tested whether that model can be used to predict things other than the original observation. Until they do that (or someone else does it), their theory should not be believed.

Anyway, I think I'm done talking about this paper. I am NOT trying to say that Acemoglu and Robinson are wrong, or that they have made any mistakes in their research. What I am trying to do is to illustrate the usefulness of blogs. Even if I've made some mistakes about the particulars (and I may have!), I hope I've shown that blogs, while not a substitute for academic research, do have something to contribute to the academic discussion - by pointing out assumptions, identifying relationships between assumptions and conclusions, discussing alternative assumptions, and evaluating the current status of the research. This is much more than just "distilling well-understood and broadly-accepted notions", which Acemoglu and Robinson claim to be the purpose of blogging.

Update: Some people apparently have been thinking that I'm accusing Acemoglu et al. of political bias. I am doing no such thing. Acemoglu et al. almost certainly just want to demonstrate a neat idea they had (the "asymmetric equilibrium" between "cutthroat" and "cuddly" countries). Demonstrating that, though, requires a model whose assumptions are bound not to be very pleasing to liberals...although again, that's not necessarily the only reason that liberal bloggers criticized the paper. In econ, a lot of accusations and counter-accusations of political bias are always flying around, but I like to keep those to a minimum.

61 comments:

  1. Hi Noah,

    I think you're somewhat missing the point of this paper. You suggest that the point of the paper is that innovation responds to incentives, and then argue that this result is (a) natural and (b) a result of their assumptions and therefore (c) not very interesting. All of your arguments are correct, but the paper is about a different argument, which is somewhat subtle, counterintuitive, and interesting.

    Their argument is that in a model where every country contributes to the world technology frontier, (a) cuddly capitalism and cutthroat capitalism can coexist in equilibrium, (b) cuddly capitalist countries have higher welfare than cutthroat countries, but (c) cut-throat countries nonetheless do not want to become cuddly capitalists. In other words, even though Swedes may be happier than Americans, Americans don't want to become Swedes. This is because their model features an asymmetric equilibrium in which the technology leader would be worse if it switched to a cuddly capitalist, because then technological progress would stagnate.

    Put this way, their paper is neither an indictment of Scandanavian-style capitalism, nor a ringing endorsement of a more cutthroat style that might be called American. Rather, it provides some intuition about why multiple kinds of capitalism might coexist in equilibrium.

    Incidentally, you suggest that this result is a mechanical product of their assumptions, but that claim is clearly false because the asymmetric equilibrium only arises for some parameter values -- it doesn't have to happen at all.

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    1. No, I understand that this is the point of the paper. But that point is also pretty conventional wisdom...I've heard random people say it a bunch. "We do the innovating, and those Europeans take advantage of it...but I guess their poor people get to have health care!" Very common.

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    2. polymath4:09 AM

      Noah, I think you're still missing it! It is NOT conventional wisdom that there is an asymmetric equilibrium. The conventional wisdom is that we are being charitable (or taken for chumps), but the paper says that (for some parameter values) LMEs are not being charitable and the fact that CMEs can take advantage of it is merely a positive externality.

      I think you're illustrating the deep differences between the "applied" nature of blogs and the theoretical nature of many macro papers. Reread Dan's last paragraph above -- that's their result. One can debate the value of A&R's result. One can complain that their result is being misapplied to the real world. One can complain that A&R encourage that misapplication, or even that they do it themselves. Those are typical problems faced by populizers of science (across many disciplines). That doesn't make the result CW.

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    3. Noah, I think you're still missing it! It is NOT conventional wisdom that there is an asymmetric equilibrium.

      Leaving aside that point for a moment, imagine if the authors had constructed a model in which social insurance ("cuddly" capitalism) leads to more innovation, and the asymmetric equilibrium had gone the other way...

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    4. The conventional wisdom is that we are being charitable (or taken for chumps), but the paper says that (for some parameter values) LMEs are not being charitable and the fact that CMEs can take advantage of it is merely a positive externality.

      Not sure you're right about that. I think the CW is that it would be nice if Europe innovated more instead of copying our stuff, but it's worth our while to innovate even if some of our stuff gets taken. That's exactly the result that Acemoglu et al. obtain.

      I think you're illustrating the deep differences between the "applied" nature of blogs and the theoretical nature of many macro papers.

      Again, I think you're wrong...blogs are extremely limited in their ability to do real quality empirical work or policy analysis, due to the difficulty of presenting data on a blog (just read Vox EU to see what I mean). Instead, blogs are useful for examining assumptions, which are the deepest and most foundational part of theory.

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    5. "Their argument is that in a model where every country contributes to the world technology frontier, (a) cuddly capitalism and cutthroat capitalism can coexist in equilibrium..."

      Since they actually coexist in the real world I don't see how this is an insightful result.

      "even though Swedes may be happier than Americans, Americans don't want to become Swedes. This is because their model features an asymmetric equilibrium in which the technology leader would be worse if it switched to a cuddly capitalist, because then technological progress would stagnate."

      According to Acemoglu and Robinson this is really their main result, but how is this surprising? It is an equilibrium after all. They already proved the equilibrium existed. If it is an equilibrium everybody is best-responding. What are we learning here that is counter-intuitive? You could answer we are learning the rationale for each country's actions, but those depend on what you are assuming: there is specialization, entrepreneurial effort depends on the income gap, etc. You say the occurrence of differentiated equ'm depends on some paramenters, but what do those parameters mean in practical terms?

      I mean, I do have great respect for Acemoglu, Robinson and Verdier, and as most people admire the mathematical talent needed to produce this type of sophisticated modeling, but at the same time I also feel within economics this type of theoretical research receives much more praise than it deserves.

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    6. If the point of A&R's paper were to demonstrate why this coexistence-equilibrium exists, then it really would be a pointless paper. The argument then would be that the US doesn't switch to "cuddly" capitalism because everyone *already knows* the paper's result (that cuddly capitalists free-ride on cutthroats). In other words, the model assumes that everyone already knows the model.

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    7. The contribution of the model is that it shows the conditions (parameter values) under which the equilibrium observed in real life can occur in the model under given assumptions. The suprising aspect is that it does not occur under all parameter values, even if assumptions that Noah highlighted are unchanged. The fact that this is so difficult for some to grasp or uninteresting highlights the point Acemoglu made about blogs.

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    8. The suprising aspect is that it does not occur under all parameter values

      Unintuitive parameter restrictions just mean they didn't manage to make a model where the equilibrium they like is unique. ;-)

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  2. I don't think their theory addes much. It doesn't have any significant empirical evidence behind it, I would bet they were not only aware of the patent data, but also the other innovation measures that do not support their theory. Conveniently they only seem to have sited the one that fit their just so story.

    More to the point though, I am not sure the "entrepneur" model is an affective model for explaining technological innovation. Granted secure property rights and such are needed, but not for nothing is Robert Allen's seminal work on the industrial revolution focus on high labor costs as the impetus to make technological innovation financially worth doing.

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    1. Come to think of it a labor cost model would be more consistent with the R & A model in "Why Nations Fail", the vast majority of historical repression by political elites has been to keep labor cheep. Arguably a country with strong social democratic protections and full employment would provide greater incentives for labor saving innovation as well as opportunities to entrepreneurs to do so.

      Great story in FT Alphaville on wages in Norway's oil sector and the push for mechanization there, "What driverless trucks in Oz mean for Oil Workers in Norway" (can't link on I-pad)

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    2. "Arguably a country with strong social democratic protections and full employment would provide greater incentives for labor saving innovation as well as opportunities to entrepreneurs to do so."

      There is solid historical evidence for this piling up. It would be nice to see it consolidated.

      There really is a conflict between the short-term interests of elites (rent extraction with thugs, applying negative externalities to poor people) and the long-term interests of everyone (uh, 'not doing that').

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  3. They have not only ignored innovation measures that don't fit their theory, as OGT says, they've also ignored the cuddlier aspects of the US state - such as its high corporation tax rates, its extensive system of in-work benefits and its considerable support for home ownership. In taking such a partial view of the data they've reinforced national stereotypes, but they haven't demonstrated that such a division into "cutthroat" and "cuddly" actually exists in reality, at least in developed economies. If they had compared the US with a major emerging market economy the results might have been different.

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  4. How come that the famous Mittelstand exists in Germany and not in the USA?

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    1. Check out this book: http://www.amazon.com/Regional-Advantage-Culture-Competition-Silicon/dp/0674753402

      For much of its history, Silicon Valley was basically a regional network of small manufacturers that looked in some ways very similar to the Mittelstand. Before that, Detroit was a cluster of small and medium sized auto parts manufacturers.

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    2. "Silicon Valley" to a large extent is "funded" by foreign intellectual capital. This is hardly an economic achievement of the "cut-throat" system.

      And it is just one industry.

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  5. You are right. The model should include dissipation of efforts (money, working time, etc.) due to very high failure rate. For example, according to the Census Bureau (http://www.census.gov/econ/susb/index.html) 90% of new companies live less than 1 year (97% live lessthan 3 years). I would suggest that most of investments (time and money spent) disappear. In a sense, an inventive country is prone to a lower rate of growth due to excessive loses.

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  6. Anonymous9:32 AM

    I've read their blog entry and I came to the conclusion that the whole line of literature seems to be flawed.

    First, the distinction between 'radical innovation' and 'incremental innovation' is arbitrary. Software development or semiconductors are radical innovation? This might have been the case 60 years ago, but not these days. On the other hand, machine tools and specialized transport equipment probably would have been considered 'radical innovations' in the 18th or 19th century. And there is the strange coincidence that the mentioned 'radical innovation' are those technologies in which the US have a comparative advantage.

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  7. Nate O9:59 AM

    "I am NOT trying to say that Acemoglu and Robinson are wrong, or that they have made any mistakes in their research."

    That's absolutely what you're saying, and I agree with you. "And one cardinal rule of scientific theorizing is that your model should be tested on data other than the data used to construct the model."

    I'd like to see comparisons with a broader range of countries, like China, Brazil, and India, where capitalism is in some ways even more "cutthroat" than in the US. Logically, they should win all the patents.

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  8. That's absolutely what you're saying, and I agree with you. "And one cardinal rule of scientific theorizing is that your model should be tested on data other than the data used to construct the model."

    No, it's not. Theorizing without empirical testing is fine, it's just incomplete.

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    1. Nate O4:32 PM

      I guess I don't really understand your point then.

      Correct me if I'm wrong, but after reading their paper, this is my impression:
      1) Acemoglu et al knew America is more wealthy and has issued more patents then Sweden.
      2) They made a completely unreasonable series of simplifications about both countries.
      3) They conclude that Sweden has fewer patents because they have social insurance.

      That sounds a lot like torturing math and logic to justify their bias, not a "scientific" paper examining an issue.

      In your words, "Acemoglu et al. have not yet succeeded in explaining anything about the world." Which I agree with.

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    2. Well, we could test the model by looking at data on successful vs. failed entrepreneurs in various countries...not that anyone will go and do this, mind you...

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  9. The thing that drives me nuts about these kinds of papers (and a point I haven't seen anyone make) is that comparing patent data across countries is utterly meaningless. This would only make sense if there were an international patenting agency that applied all the same rules to every country and whose patents were universally respected. But in reality that is not the case.

    Every country has its own patent system. An American patent is worth exactly nada outside of the US. You have to patent your invention in each and every country to nail down intellectual property rights. On the other hand there are treaties that make it so that a foreigner can get a patent in another country, i.e. a Swede has all the same rights to get a US patent as an American and vice-versa. So there's no way to know how many of A&R's "American patents" were actually filed by Americans. A lazy cheese eating French guy sitting Paris could just as easily get a US patent as a fearless hardworking entrepreneur in Chicago.

    And to make it even worse the conditions for getting a patent are by no means uniform across countries. The costs and criteria can be considerably different. For example, I am currently working on patenting a tool here in Canada and in the US and believe me the quality expectations of the application are quite different. If you look at Canadian patents a lot of them have schematics that look like they were hand drawn by a three year old with Down's syndrome while the American ones are all very slick and professional looking. The Canadian patent office is apparently run by a Canadian relative of Arthur Laffer…

    On top of that one would expect the US to attract the most patents as it is the biggest single market one can cover with a single patent. It’s a pretty simple calculation. And it’s the reason I’m going to patent is the US first for sure even though I live in Montreal…

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  10. Anonymous12:26 PM

    Harry Potter wouldn't exist if it wasn't for Britain's welfare state. Just sayin'.

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  11. My experience working in both Sweden and in the US is that the Swedes are fundamentally *more* entrepreneurial. For a variety of reasons, the compensation of top managers in established businesses is not that much higher than the compensation of workers (at least compared to the US). The only way to get *really* rich is to start a successful business. So people who are motivated by wealth almost automatically become entrepreneurs.

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    1. Yep,
      but entrepeneurial doesn't mean innovative doesn't mean a patent.
      If we had a unified world-wide patent system I would be a little less skeptical, but surely the recent Apple versus Samsumg case should have made people suspicious.

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  12. JustBob8112:58 PM

    There needs to be a concerted assault on the misuse of 'counter-intuitive' by economists and formal modelers. The giddiness at constructing situations where they can say, 'you think you're doing A but in reality what you're really doing is negative A' is really pathological. The use of counter-intuitive in papers like this means counter-intuitive to the unelect, those who haven't learned the secret knowledge.

    What makes this impulse particularly bad is that the search for 'counter-intuitive' is given far more weight than the search for 'a thing that actually exists'.

    P.S. If comments like this were given by editors far more often, then they wouldn't need to be given by bloggers.

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  13. Anonymous1:52 PM

    Noah, why do you waste time with this blog instead of doing real research like all of the actual economists who exist in all of the high places you AREN'T published?

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    1. That's a damn good question. And there is a good answer to it, but I can't tell you that answer. You can try to guess, if you like.

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    2. Anonymous, why do you waste time in this comment section instead of doing real research like all of the actual economists who exist in all of the high places you AREN'T published?

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    3. Nate O4:35 PM

      I hope you're not implying that what Acemoglu et. al. did was "real research."

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  14. NIcely written and very respectful, Noah. IMO, more respectful than it deserves, since it seems like just another example of economics as a branch of rhetoric or propoganda, not science.

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  15. First, I want to berate Leroy Dumonde for stealing my fire. The US is the largest consumer market on the planet. It only makes sense that the US patent and trademark office would be first stop for anyone who's got a consumer product to sell or a business process to implement.

    I think the fast growing rate of inequality in the US is primarily driven by two phenomena. The first is economic--the opportunity cost of doing business in the United States is incredibly high in the US relative to other capitalist nations, as Noah describes.

    The second is that in the US, ordinary workers are regarded as losers. There simply is no regard for people who strive and struggle against long odds just to pay their bills or care for their families. Instead of rewarding effort, we have decided that anyone who is not wealthy and successful should be punished for being unworthy of Jesus, stupid, faithless, lacking top-talent, etc, etc. As a result it takes Congress two weeks to pass the Ultra-Corporate Executive Bonus Pool Bailout of 2008, but 4+ to pass a jobs bill. Cutting food stamps and education to ensure the well-being of CEO's. Tell me the US economy is not a game of Right-To-Rule combined with Dance, Monkey, Dance and I will show you a blind sell-out.

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  16. Anonymous5:43 PM

    Let alone the fact that many American patents are based and made on human capital coming from.... overseas. The real advantage do not come from the reward but for a enviable ability for global human resources management.

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  17. Nate O6:08 PM

    I've been looking through the WIPO info, and I can't figure out how they arrived at their numbers. From Acemoglu et. al.'s paper "For instance, the U.S. number of 783 patent filings per million residents in 2010 is obtained by dividing the total number of patent filings by U.S. citizens at the U.S. patent office (USPTO), by million residents"

    From the WIPO report they cite, Annex I "Intellectual property Applications by office," The US office had 490,226 patents filed. US population in 2010 was 308,745,538. So 490,226 / 308.7m = 1588 patents per million people, not 783.

    South Korea filed 170,101 patents and has ~50m residents so 3402 patents/million residents, more than double the US.
    Japan - 344,598 patents per ~127m = 2713 p/m
    Germany - 59,245 per ~81.7m = 725 p/m
    Sweden - 2,549 per ~9.4m = 271 p/m
    Finland - 1,833 per ~5.4m = 339 p/m
    Switzerland - 2,155 per ~7.9m = 272 p/m
    India - 34,287 per ~1241m = 28 p/m
    Australia - 24,887 per ~22.6m = 1101 p/m
    Canada - 35,449 per ~34.4m = 1030 p/m
    Singapore - 9,773 per ~5.1m = 1916 p/m
    China - 391,177 per ~1344m = 291 p/m
    Hong Kong - 11,702 per ~7m = 1671 p/m

    So, what's the pattern? I don't really know if social insurance is lower in Japan, Korea, and Singapore than the US. It could also be that patents per million residents is an meaningless measure of innovation.

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    1. Nate O6:18 PM

      I've been looking through the World Economic Forum's competitiveness report. They seem to have more reasonable and nuanced metrics for "innovation," and they consistently rank Germany, Switzerland, Sweden and Finland above the US in terms of how companies obtain technology, quality of research institutions, R+D funding, availability of scientists and engineers, and (oddly) PCT patent applications per million residents.

      I guess a lot of the US patents don't go through the PCT?

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    2. Anonymous9:59 PM

      In this case they were measuring resident (domestic) filings. Half the patents filed in the US are filed by non-residents (foreigners). So adjust your country numbers by their resident/non-resident ratios and you get what they are measuring.

      Even so there are some problems with this measure. For some reason they don't seem to account for filings at the European Patent Office. It makes sense for innovators in small countries to file through a central institution, as they then get patents in EPO member countries with minimal fuss. However, patents filed through the EPO shows up as non-resident patents in national statistics. So this study apparently excludes a fair amount of "domestic" patents as foreign. I would posit this largely explains the continuing decrease in per capita resident patent filings, and be more in line with other studies that shows Nordic countries are highly innovative.

      Note that when you adjust for resident filings Germany suddenly looks a lot more innovative than America (even more so when we account for the EPO effect). Looking at Japan with its huge lead in resident per capita filings this could indicate that well-developed countries with large populations have some form of advantage of scale thing going on. Anyway, last I looked both Germany and Japan appeared to be "cuddlier" than the US so I don't think this study proves their hypothesis at all.

      Further problems that I spot is that there are some innovations that can be patented in America but not in Europe (for example software source code). Naturally a multinational would file these as a resident American patent through a subsidiary. For example Nokia has the world's largest patent portfolio in the field of mobile telephony but many of them are software patents and thus filed at the USPTO.

      Another thing that strikes me as a possibility is that there might be a tax advantage for multinationals to file the fruits of their research as "resident" American patents. America does after all have very low capital gains tax.

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    3. Nate O11:49 AM

      Yeah, after I posted that I found the table they used that broke down patents into 'resident' and 'nonresident.'

      Resident patents per population (millions):
      Germany ~ 575
      Japan ~ 2269
      S. Korea ~ 2646
      N. Korea ~ 327
      Sweden ~ 231
      Russia ~ 202
      Mexico ~ 8.4
      Thailand ~ 17
      Uruguay ~ 6.9

      I compared those numbers to the entrepreneurship rates I found on GEM, and the countries with the highest rates of entrepreneurship were Thailand and the smaller South American countries, all of which have very low patent filings, and high inequality.

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  18. Acemoglu, in his Growth text, mentions in one paragraph in the chapter on technology that there is a debate about whether forward-looking agents can be said to maximize expected payoffs from their innovations. That debate gets dismissed without discussion, asserting conventionally that people will not innovate without being able to reap the reward.

    On my reading, the vast majority of growth literature takes this view, and Acemoglu and Robinson's most recent paper does too. That assumption implies that patents are a good proxy of innovativeness, when without looking at the patents and their circumstances, we don't know whether they're mostly defensive efforts at capture as against insurance of progress.

    Mokyr published a seminal paper in AER explaining in strong historical detail that patent rights were terrible during the Industrial Revolution. Doug Allen points out in his recent book on Institutions that in the same period, police protection and local court protection of property rights was barely better than a system of night-watchmen and beatings.

    The idea that enforcement of private property rights over innovative ideas, one of the few examples of a nonexcludable and nonrival good, determines their supply is silly. And it takes *demand* for innovation entirely for granted, as if languishing masses of course want new products and processes if only the entrepreneurs and politicians would get the supply right.

    Anyway, what seems to my mind to drive TFP more than anything is an agglomeration and synergy of micro and process invention, not the salient stuff that's easy to measure and nail contracts to.

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    1. "That debate gets dismissed without discussion, asserting conventionally that people will not innovate without being able to reap the reward. "

      Which is known to be false. I know actual inventors. So they're starting from false premises, again.

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  19. It is hard to imagine that Apples patents on how to unlock screens represent a significant value to milk.

    Maybe exports per capita are a much better measure? It is also hard to believe that the cut-throat capitalism in the USA would fail on monetizing its advantages through exports.

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  20. I know why Noah doesn't spend all of his time doing 'real' research. If he did, he wouldn't have the time to read Kurt Vonnegut. Well, that and trying to save us all from the return of Cthulhu.

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  21. I sympathise with what Acemoglu and Robinson are trying to illustrate but the methodology falls apart on bogus assumptions. Patents as a measure of innovation? Probability of success determined by hard work? Gimme a break.

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  22. The paper ignited a discussion. The most valuable contribution might be a detailed analysis of the asymmetric equilibrium. Great work. However, the model might be further developed. If there is an equilibrium between the US and Scandinavian countries, than there might be an equilibrium between the developed and developing countries as the same economic trends apply. This fits quite nicely to the fact that the US is for more than 100 years the leader in economic development and that, with very limited exclusion, the world hierarchy has not changed so much since the time of industrial revolution. The US provides benefits to the rest of the world through technologic breakthroughs and higher social inequality, but it benefit quite nicely from this relationship: it is attractive for talent from all over the word, it has the say in all international institutions and no meaningful trade agreement can be done without their commitment. Its military power might be higher than the rest of the word combined, thus having the possibility to intervene whenever it perceives that it interests are under threat. It has the outstanding privilege to issue a world currency, a source of wealth enhancement, second to none. A long story short, the US is more than compensated for the relative loss of resources from followers. If we look at figures behind GDP, the standard of living of poor Americans is – at least in some significant measures like housing – higher than the average European (Dwelling space (square feet) per person for poor hourseholdes: USA vs. average Europe: 395,7 : 438,6 http://www.timbro.se/bokhandel/pdf/9175665646.pdf, page 23).
    If we speak about the ambition to create a world model, we should not speak only about the developed world. More than 1 billion people work on or near subsistence, despite the fact that wealth creation and population has increased significantly during the last 200 years. Thus, the effort/reward structure from innovation might positive for the developed world, but might become negative to the developing world. For example, fragile and failed states do not have the capacity to incorporate innovations; they are overstretched and break down. Political implications? A lot! Let us continue the discussion!

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    1. Dwelling space is a VERY POOR measure of standard of living - ask any New York resident.

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  23. Noah, you are make errors of biblical proportions. You see, it's well known that the USA is at the most efficient production possibilities frontier, and the other countries ape the USA to 'catch up', Sweden included. This is well known. Further, the strength of US patents vis-a-vis Swedish, Japanese and Chinese patents is well known. Innovation is correlated with patents filed, compare IBM vs Dell. The strength of a patent btw can be drawn from the number of other patents that cite it--in this respect it's been shown indeed the big filers (IBM) patents are stronger than the low filers (Dell). Finally, the authors assumptions, built into the math, are plausible. But your post was good too, keep it going.

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    1. Is this meant to be sarcasm?

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  24. Funny enough, judging by their previous writing (particularly on inequality, where they appear to believe in Will Wilkinson's variant on the Road to Serfdom) I had always assumed Acemoglu & Robinson were solidly liberal. And even this paper isn't enough to convince me otherwise.

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  25. Seems appropriate to link to this:
    http://www.motherjones.com/kevin-drum/2012/10/quote-day-patents-and-end-innovation

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    1. Wow -- Google and Apple spend more on patents than research and development. Defensive capture.

      You know, in economics we have many arguments for the existence of market failure, and the recommendation then goes that we ought to establish some sort of monopoly to correct for it.

      No recommendation from the economics profession has probably done more harm than that, recast again and again in different costumes.

      Ideas aren't underproduced -- people think on and share ideas all the time.

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    2. Doesn't this sort of relate back to the issue about measurement of innovation. Patents aren't the measure of innovation, they are consequence of the chance to monopolise innovation.

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    3. And notice also - that by assumption the rest of the world is benefitting from the innovation - but if there is a patent on the innovation then the monopolist patenter wins almost all the benefit from the innovation. Something is not right here.

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  26. From the paragraph quoted in the post, it seems that Acemoglu and Robinson conflate blogging with writing newspaper columns or any popular review of a scientific subject. So, I agree with Noah.

    To me, one use of the internet is that now the world is one big ongoing seminar. Just like, when someone is presenting a paper (whether at a big meeting or a weekly seminar in some small university) there are questions at the end. The best questions, of course, are those that get either to the heart of the starting assumptions or to the implications of the results.

    Of course, blogs that seem really ignorant can be ignored; just like the naive question from an undergraduate smart-ass can be ignored at a conventional seminar (one always gives a polite answer, of course, and then the question is instantly forgotten). But, a big reason to take one's results "on the road" to seminars and such, is to hear questions and comments outside of the bubble of one's own department.

    And now, on the internet, there it is! The authors reviewed all that feedback without having to go anywhere.

    Anyway. I actually am interested in Noah's comment "I disagree with the idea that counterintuitiveness is inherently good when evaluating academic research" - First of all, Acemoglu and Robinson seem to be talking about unexpected results. I wonder if they mean the same thing saying "counterintuitive" as Noah means.

    Unexpected results are interesting because they suggest further experiments. Not that an idea is 'better'. Maybe "valuable" was not a good choice of word on their part.

    He says "This is not the time... for that argument." I wonder if Noah is planning to post about this subject - counterintuitive, unexpected, in relation to theory

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  27. The productivity frontier might be understood by the interaction between the public and the private sector. Thus, the US has the outstanding ability to create new corporations and markets. Thus, innovation might be measured by the ability to create new markets and enterprises. Maybe patents are a measure of innovation, but it is a mean, not an end and can be manipulated. A reflection of prevailing institutions is the mentality. Starting from the orientation of students to the perception of failure, the US is much more free-market oriented than the EU, reflecting the experience, prevailing incentives and economic conditions of millions of people. As a recent World Bank study expresses, Europe has become the world’s lifestyle superpower with a particular strength in transforming middle-income to high-income countries . http://www.voxeu.org/article/europe-s-growth-model. Yes, indeed, 10 years ago there was the objective to become the most competitive region in the world. The result of this top-down bureaucratic approach can be seen today. Thus, again, the difference in welfare might be lower than the gap of 25 % due to the more developed public sector, but an alignment with the productivity frontier is not a linear process, the close you come, the higher are the requirements. There are different qualities of the economic process. The EU – at least within the current paradigm of technology – is embedded in a global niche with clear borders and the US is embedded with higher reward and more stress in terms of innovation, instability, and the ups and downs of a free market economy, but with a clear political consensus to keep this growth trajectory. Thus the asymmetric growth equilibrium.

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  28. JohnR1:43 PM

    As usual, the comments section is almost as informative and entertaining as the post itself. Not half bad! However, setting aside the writing, the analysis and the interpretation for the moment, I would like to go on record that the main reason I stop in here and enjoy myself each time is demonstrated by our estimable host using in the space of three days heading images from what I regard as arguably the greatest children's movie of all time and the greatest children's author of all time. Even at my Dawes (Sr.)-like age I still enjoy the movie, which (practically unique among Disney films) managed to vastly improve upon the rather repellant source books. The only thing I can say about Doctor Seuss is that, like The Princess Bride, his works provide apt quotes for pretty much every imaginable circumstance in life.
    As to the content of the post - unfortunately, GIGO is a fact of life in pretty much every human endeavour. It's so easy to overlook that our starting assumptions necessarily lead to our desired conclusion, and then bask in the warm comfort that we have proved our point through sheer bravery and cunning as well as our inherent nobility of soul. That way, of course, lies disaster.

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  29. I think this critique works for a lot of economic research--I especially like this point: "When it comes to this kind of modeling, what you get out is pretty much what you put in." Counterintuitive results in macroeconomic models aren't very common.

    One thought about this point: "To my knowledge - and if I am wrong, please correct me! - this reward structure and this "return to effort", are not taken from any microeconomic study of entrepreneurial behavior;" The relevant research here, it seems to me, would be the efficiency wage literature, which has documented the effect where worker's effort increases as their compensation increases. But if you are going to apply this to macro you have a huge empirical problem, which is that effort is definitely not increasing in the absolute level of compensation, but rather only in the level of compensation relative to workers elsewhere. So applying this result to Acemoglu and Robinson implies that american entrepreneurs put in more effort only because there are places like Sweden where people get compensated less. In the aggregate, the impact of "rewarding success" would be ambiguous since if everyone followed the same policies, then the level of effort everywhere would be less than in the US and more than in Sweden, regardless of which particular policy is chosen.

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  30. this ideas is a built-in assumption; is is not the result of the model, it is the model's starting point.It makes intuitive sense that the bigger the risk from losing, the more people will try hard not to end up being losers.

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  31. Wow. What a terrible paper.

    We know for a fact that most patents in the US are worthless pieces of rent-seeking (just look at the *extensive* literature on software patents and business method patents), so they have started with a bad assumption (the assumption that patents reflect invention). That's on top of the bad modelling you describe.

    GIGO indeed.

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  32. Anonymous10:14 AM

    Two things:

    1. I think you're missing the interesting part of the results. The interesting part is not that if you assume rewards drive innovation, you find that rewards drive innovation. The interesting part is that, starting from a baseline of otherwise identical countries, an asymmetric equilibrium may emerge where countries adopt different levels of reward structures. So the US doesn't want to be more like Sweden, and Sweden doesn't want to be more like the US. My prior would be that identical countries would choose the same level of reward structures, so that's where the counterintuitive part comes in.

    So it's a bit strange that you argue that their result is not counterintuitive (The notion that there is a tradeoff between innovation and redistribution is quite a commonly-held belief) and then note in the very next sentence that this is in fact not their result. Or to put it more pointedly, your statement: "Given these assumptions, the result of the model is not hard to predict - when you let losers lose and winners win, innovators try harder. Not exactly a shocker, given the assumptions" completely misses the point. They are not trying to show that people innovate more with more rewards - that's a mechanism they take as an assumption - they're trying to show that conditional on that assumption, asymmetric forms of capitalism can emerge from otherwise identical countries.

    2. On that point, the emphasis on the poor patent data also misses the point - it's simply a motivating example in the introduction. The key support for the assumption everyone hates is on page 8: "As mentioned above, Hall and Soskice (2001) argue that while both CME and LMEs are innovative, they innovate in different ways and in different sectors. LMEs are good at "radical innovation" characteristic of particular sectors, like software development, biotechnology and semiconductors, while CMEs are good at "incremental innovation" in sectors such as machine tools, consumer durables and specialized transport equipment (see Taylor, 2004, and Akkermans, Castaldi, and Los, 2009, for assessments of the empirical evidence on these issues)."

    THIS is where critiques of ARV's paper should be looking if they want to gut their Assumption 1, yet I haven't seen too much discussion of these papers specifically. This is the empirical support they are calling on for their assumption. I mean, the 2009 paper is titled "Do liberal market economies really innovate more radically than coordinated market economies? Hall and Sos-
    kice reconsidered" - maybe someone should look at that.

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  33. Anonymous10:32 AM

    In addition, I think a stronger criticism of the counterintuitive-ness of their main result (the existence of asymmetric equilibrium with identical countries) is that they are essentially assuming that the world technology frontier advances only due to the innovation leader which by assumption is the cutthroat country (though they slighly relax this later in the paper). So essentially they're assuming R&D is essentially a best-shot public good.

    We know that the first-best solution to a best-shot public good is for one country to shoulder all the costs of producing the best-shot good, and for everyone else to free-ride since additional effort is wasted duplication. Since this is first-best it implies that there is some surplus generated by this solution, and so in some sense it's not surprising that conditions exist where this surplus could be captured by the cutthroat country in sufficient quantity to compensate the extra costs they undertake. If so, then the cutthroat country wouldn't want to be cuddly (the surplus compensates the costs of being cutthroat), and the cuddly country wouldn't want to be cutthroat (extra effort from being cutthroat is effectively wasted), and so an asymmetric equilibrium is not surprising.

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