Category: Economics

Steven Johnson Is Advocate of Collaboration in Innovation

(p. A13) Theories of innovation and entrepreneurship have always yo-yoed between two basic ideas. First, that it’s all about the single brilliant individual and his eureka moment that changes the world. Second, that it’s about networks, collaboration and context. The truth, as in all such philosophical dogfights, is somewhere in between. But that does not stop the bickering. This controversy blew up in a political context during the 2012 presidential election, when President Obama used an ill-chosen set of words (“you didn’t build that”) to suggest that government and society had a role in creating the setting for entrepreneurs to flourish, and Republicans berated him for denigrating the rugged individualists of American enterprise.
Through a series of elegant books about the history of technological innovation, Steven Johnson has become one of the most persuasive advocates for the role of collaboration in innovation. His latest, “How We Got to Now,” accompanies a PBS series on what he calls the “six innovations that made the modern world.” The six are detailed in chapters titled “Glass,” “Cold,” “Sound,” “Clean,” “Time” and “Light.” Mr. Johnson’s method is to start with a single innovation and then hopscotch through history to illuminate its vast and often unintended consequences.

For the full review, see:
PHILIP DELVES BROUGHTON. “BOOKSHELF; Unintended Consequences; Gutenberg’s printing press sparked a revolution in lens-making, which led to eyeglasses, microscopes and, yes, the selfie.” The Wall Street Journal (Tues., Sept. 30, 2014): A13.
(Note: ellipses added.)
(Note: the online version of the review has the date Sept. 29, 2014, and has the title “BOOKSHELF; Book Review: ‘How We Got to Now’ by Steven Johnson; Gutenberg’s printing press sparked a revolution in lens-making, which led to eyeglasses, microscopes and, yes, the selfie.” )

The book under review, is:
Johnson, Steven. How We Got to Now: Six Innovations That Made the Modern World. New York: Riverhead Books, 2014.

Tesla Cars Are Built on Government Subsidies

(p. A13) Nowhere in Mr. Vance’s book, . . . , does the figure $7,500 appear–the direct taxpayer rebate to each U.S. buyer of Mr. Musk’s car. You wouldn’t know that 10% of all Model S cars have been sold in Norway–though Tesla’s own 10-K lists the possible loss of generous Norwegian tax benefits as a substantial risk to the company.
Barely developed in passing is that Tesla likely might not exist without a former State Department official whom Mr. Musk hired to explore “what types of tax credits and rebates Tesla might be able to drum up around its electric vehicles,” which eventually would include a $465 million government-backed loan.
And how Tesla came by its ex-Toyota factory in California “for free,” via a “string of fortunate turns” that allowed Tesla to float its IPO a few weeks later, is just a thing that happens in Mr. Vance’s book, not the full-bore political intrigue it actually was.
The fact is, Mr. Musk has yet to show that Tesla’s stock market value (currently $32 billion) is anything but a modest fraction of the discounted value of its expected future subsidies. In 2017, he plans to introduce his Model 3, a $35,000 car for the middle class. He expects to sell hundreds of thousands a year. Somehow we doubt he intends to make it easy for politicians to whip away the $7,500 tax credit just when somebody besides the rich can benefit from it–in which case the annual gift from taxpayers will quickly mount to several billion dollars each year.
Mother Jones, in a long piece about what Mr. Musk owes the taxpayer, suggested the wunderkind could be a “bit more grateful, a bit more humble.” Unmentioned was the shaky underpinning of this largess. Even today’s politicized climate modeling allows the possibility that climate sensitivity to carbon dioxide is far less than would justify incurring major expense to change the energy infrastructure of the world (and you certainly wouldn’t begin with luxury cars). Were this understanding to become widespread, the subliminal hum of government favoritism could overnight become Tesla’s biggest liability.

For the full commentary, see:
HOLMAN W. JENKINS, JR. “BUSINESS WORLD; The Savior Elon Musk; Tesla’s impresario is right about one thing: Humanity’s preservation is a legitimate government interest.” The Wall Street Journal (Sat., May 30, 2015): A13.
(Note: ellipsis added.)
(Note: the online version of the commentary has the date May 29, 2015.)

The book discussed in the commentary is:
Vance, Ashlee. Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future. New York: Ecco, 2015.

The Mother Jones article discussing government subsidies for Musk’s Tesla, is:
Harkinson, Josh. “Free Ride.” Mother Jones 38, no. 5 (Sept./Oct. 2013): 20-25.

Little Progress Toward Complex Autonomous Robots

(p. A8) [In June 2015] . . . , the Defense Advanced Research Projects Agency, a Pentagon research arm, . . . [held] the final competition in its Robotics Challenge in Pomona, Calif. With $2 million in prize money for the robot that performs best in a series of rescue-oriented tasks in under an hour, the event . . . offer[ed] what engineers refer to as the “ground truth” — a reality check on the state of the art in the field of mobile robotics.

A preview of their work suggests that nobody needs to worry about a Terminator creating havoc anytime soon. Given a year and a half to improve their machines, the roboticists, who shared details about their work in interviews before the contest in June, appear to have made limited progress.
. . .
“The extraordinary thing that has happened in the last five years is that we have seemed to make extraordininary progress in machine perception,” said Gill Pratt, the Darpa program manager in charge of the Robotics Challenge.
Pattern recognition hardware and software has made it possible for computers to make dramatic progress in computer vision and speech understanding. In contrast, Dr. Pratt said, little headway has been made in “cognition,” the higher-level humanlike processes required for robot planning and true autonomy. As a result, both in the Darpa contest and in the field of robotics more broadly, there has been a re-emphasis on the idea of human-machine partnerships.
“It is extremely important to remember that the Darpa Robotics Challenge is about a team of humans and machines working together,” he said. “Without the person, these machines could hardly do anything at all.”
In fact, the steep challenge in making progress toward mobile robots that can mimic human capabilities is causing robotics researchers worldwide to rethink their goals. Now, instead of trying to build completely autonomous robots, many researchers have begun to think instead of creating ensembles of humans and robots, an approach they describe as co-robots or “cloud robotics.”
Ken Goldberg, a University of California, Berkeley, roboticist, has called on the computing world to drop its obsession with singularity, the much-ballyhooed time when computers are predicted to surpass their human designers. Rather, he has proposed a concept he calls “multiplicity,” with diverse groups of humans and machines solving problems through collaboration.
For decades, artificial-intelligence researchers have noted that the simplest tasks for humans, such as reaching into a pocket to retrieve a quarter, are the most challenging for machines.
“The intuitive idea is that the more money you spend on a robot, the more autonomy you will be able to design into it,” said Rodney Brooks, an M.I.T. roboticist and co-founder two early companies, iRobot and Rethink Robotics. “The fact is actually the opposite is true: The cheaper the robot, the more autonomy it has.”
For example, iRobot’s Roomba robot is autonomous, but the vacuuming task it performs by wandering around rooms is extremely simple. By contrast, the company’s Packbot is more expensive, designed for defusing bombs, and must be teleoperated or controlled wirelessly by people.

For the full story, see:
JOHN MARKOFF. “A Reality Check for A.I.” The New York Times (Tues., MAY 26, 2015): D2.
(Note: ellipses, and bracketed expressions, added. I corrected a misspelling of “extraordinary.”)
(Note: the date of the online version of the story is MAY 25, 2015, and has the title “Relax, the Terminator Is Far Away.”)

Institutional Improvements Can Sometimes Be Designed, Rather than Only Spontaneous

A distinguished school of libertarian and neo-Austrian economic thought argues, following F.A. Hayek, that institutional improvements only arise from spontaneous order, and never from conscious design. There is something to their argument, but the designs of Alvin Roth provide counter-examples.

(p. A13) Mr. Roth’s work has been to discover the most efficient and equitable methods of matching and implement them in the world. He writes with verve and style, describing many market malfunctions–from aboriginal tribes in Australia arranging marriages for children not yet born to judges bending every rule in the book to hire law clerks years before they have graduated from law school–and how we ought to think about them.

Mr. Roth’s approach contrasts with standard debates over free markets versus government regulation. We want markets to be thick, quick, timely and trustworthy, but without careful design markets can become thin, slow, ill-timed and dangerous for the honest. The solution to these problems is unlikely to be regulation legislated from on high. Instead what Mr. Roth practices is nuanced market design created mostly by market participants. Mr. Roth found, for example, that even though the problems in the market for gastroenterologists and law clerks looked the same (hiring started years before schooling ended), the solutions had to be subtly different because of differences in culture, history and norms.

For the full review, see:
ALEX TABARROK. “BOOKSHELF; The Designer of Markets; In some markets, price isn’t the determining factor. You can choose to go to Harvard, but Harvard has to choose to accept you first.” The Wall Street Journal (Tues., JUNE 16, 2015): A13.
(Note: ellipses added.)
(Note: the online version of the review has the date JUNE 15, 2015, and has the title “BOOKSHELF; Matchmaker, Make Me a Market; In some markets, price isn’t the determining factor. You can choose to go to Harvard, but Harvard has to choose to accept you first.”)

The book under review is:
Roth, Alvin E. Who Gets What — and Why: The New Economics of Matchmaking and Market Design. New York: Houghton Mifflin Harcourt Publishing Co., 2015.

How Home Solar Panel Subsidies Increase Inequality

(p. A13) Well-meaning–but ill-conceived–federal, state and local tax incentives for rooftop solar give back between 30% and 40% of the installation costs to the owner as a tax credit. But more problematic are hidden rate subsidies, the most significant of which is called net metering, which is available in 44 states. Net metering allows solar-system owners to offset on a one-for-one basis the energy they receive from the electric grid with the solar power they generate on their roof.
While this might sound logical, it isn’t. An average California resident with solar, for example, generally pays about 17 cents per kilowatt-hour for electric service when the home’s solar panels aren’t operating. When they are operating, however, net metering requires the utility to pay that solar customer the same 17 cents per kilowatt-hour. But the solar customer still needs the grid to back up his intermittent solar panels, and the utility could have purchased that same solar power from a utility-scale solar power plant for about five cents per kilowatt-hour.
This 12-cents-per-kwh cost difference amounts to a wealth transfer from average electric customers to customers with rooftop solar systems (who also often have higher incomes). This is because utilities collect much of their fixed costs–the unavoidable costs of power plants, transmission lines, etc.–from residential customers through variable-use charges, in other words, charges based on how much energy they use. When a customer with rooftop solar purchases less electricity from the utility, he pays fewer variable-use charges and avoids contributing revenue to cover the utility’s fixed costs. The result is that all of the other customers have to pick up the difference.

For the full commentary, see:
BRIAN H. POTTS . “The Hole in the Rooftop Solar-Panel Craze; Large-scale plants make sense, but panels for houses simply transfer wealth from average electric customers.” The Wall Street Journal (Mon., May 18, 2015): A13.
(Note: ellipses added.)
(Note: the online version of the commentary has the date May 17, 2015.)

“Nimble” Account of the Creative Destruction of the Music Industry

(p. C1) Stephen Witt’s nimble new book, “How Music Got Free,” is the richest explanation to date about how the arrival of the MP3 upended almost everything about how music is distributed, consumed and stored. It’s a story you may think you know, but Mr. Witt brings fresh reporting to bear, and complicates things in terrific ways.
He pushes past Napster (Sean Fanning, dorm room, lawsuits) and goes deep on the German audio engineers who, drawing on decades of research into how the ear works, spent years developing the MP3 only to almost see it nearly become the Betamax to another group’s VHS.
. . .
(p. C6) Even better, he has found the man — a manager at a CD factory in small-town North Carolina — who over eight years leaked nearly 2,000 albums before their release, including some of the best-known rap albums of all time. He smuggled most of them out behind an oversized belt buckle before ripping them and putting them online.
Mr. Witt refers to this winsome if somewhat hapless manager, Dell Glover, as “the most fearsome digital pirate of them all.”
. . .
Into these two narratives Mr. Witt inserts a third, the story of Doug Morris, who ran the Universal Music Group from 1995 to 2011. At some points you wonder if Mr. Morris has been introduced just so the author can have sick fun with him.
The German inventors and Mr. Glover operate as if they unwittingly have voodoo dolls of this man. Every time they make an advance, and prick the music industry, there’s a jump to Mr. Morris for a reaction shot, screaming in his corner office.
. . .
Mr. Witt covers a lot of terrain in “How Music Got Free” without ever becoming bogged down in one place for long. He is knowledgeable about intellectual property issues. In finding his reporting threads, he doesn’t miss the big picture: He gives us a loge seat to the entire digital music revolution.
He is especially good on the arrival of iTunes and the iPod.

For the full review, see:
DWIGHT GARNER. “Books of The Times; That Download Has a Back Story.” The New York Times (Tues., JUNE 16, 2015): C1 & C6.
(Note: ellipses added.)
(Note: the online version of the review has the date JUNE 15, 2015, and has the title “Books of The Times; Review: In ‘How Music Got Free,’ Stephen Witt Details an Industry Sea Change.”)

The book under review is:
Witt, Stephen. How Music Got Free: The End of an Industry, the Turn of the Century, and the Patient Zero of Piracy. New York: Viking, 2015.

Computers Lack Intuition about How to Handle Novel Situations

(p. A29) It seems obvious: The best way to get rid of human error is to get rid of humans.
But that assumption, however fashionable, is itself erroneous. Our desire to liberate ourselves from ourselves is founded on a fallacy. We exaggerate the abilities of computers even as we give our own talents short shrift.
. . .
Human skill has no such constraints. Think of how Capt. Chesley B. Sullenberger III landed that Airbus A320 in the Hudson River after it hit a flock of geese and its engines lost power. Born of deep experience in the real world, such intuition lies beyond calculation. If computers had the ability to be amazed, they’d be amazed by us.
. . .
Computers break down. They have bugs. They get hacked. And when let loose in the world, they face situations that their programmers didn’t prepare them for. They work perfectly until they don’t.
. . .
We should view computers as our partners, with complementary abilities, not as our replacements.

For the full commentary, see:
NICHOLAS CARR. “Why Robots Will Always Need Us.” The New York Times (Weds., MAY 20, 2015): A29.
(Note: ellipses added.)

Banks Used “Regulatory Arbitrage” to Rent Seek at Taxpayers’ Expense

(p. 21) Between 2009 and 2011, a group of economists at New York University’s Stern School of Business published an influential series of reports and books that sought to explain what, exactly, happened during the financial crisis. The depth of the inquiry was notable because the school is generally thought of as a Wall Street-friendly training ground for future bankers. One of the most striking findings was that between 1980 and 2000, the large banks in America had significantly moved away from productivity ­enhancement and toward rent-­seeking.
For the reports’ principal authors, Matthew Richardson and Viral Acharya, the evidence of this shift came from careful study of the various ways that banks have legally evaded regulation of their capital requirements. A fundamental tenet of bank regulation is that banks shouldn’t borrow too much, because being overleveraged makes them vulnerable to collapse. But banks can most easily make huge profits if they borrow huge amounts, and they tend to pursue unsafe levels of borrowing. Then, the authors observed, they use their power as essential tools in an economy to negotiate bailouts from the government, forcing taxpayers to guarantee their losses. Richardson and Acharya showed that it was precisely because our banking regulations were so extensive and complex that banks were able to seek rents. They called this “regulatory arbitrage,” a term that means banks have harnessed regulation and turned it into a powerful business tool.

For the full commentary, see:
ADAM DAVIDSON. “Wall Street Is Using the Power of Dodd-Frank Against Itself.” The New York Times Magazine (Sun., May 31, 2015): 18 & 20-21.
(Note: ellipsis added.)
(Note: the date of the online version of the commentary is MAY 27, 2015, and has the title “Wall Street Is Using the Power of Dodd-Frank Against Itself.”)

One of the relevant papers by Acharya and Richardson is:
Acharya, Viral V., and Matthew Richardson. “Causes of the Financial Crisis.” Critical Review 21, no. 2-3 (2009): 195-210.

Not Clear If Net Neutrality Is Good for Consumers

(p. B2) Of course, government antitrust and communications policy is supposed to benefit consumers, not any individual company or group of companies. “It’s fair to say Netflix has gotten something of a free pass,” said Scott Hemphill, visiting professor of antitrust and intellectual property at New York University School of Law. “This open Internet principle that’s in ascendance is certainly good for Netflix. It’s harder to say it’s good for consumers.”
. . .
Despite Netflix’s arguments that it shouldn’t have to pay fees to a broadband provider, that proposition is hardly self-evident. The fees Netflix so fiercely opposes are analogous to those found in many industries, such as credit cards, where both consumers and merchants pay the credit card companies. “It’s hard to say if these fees are good or bad for consumers,” Professor Hemphill said.

For the full story, see:
JAMES B. STEWART. “Common Sense; Netflix’s Invisible Hand In Policy and Mergers.” The New York Times (Fri., MAY 29, 2015): B2-B3.
(Note: ellipsis added.)
(Note: the date of the online version of the story is MAY 28, 2015, and has the title “Her Majesty’s Jihadists” which was also the title used on the cover, but not at the start of the actual article on p. 42, which has the title “Common Sense; How Netflix Keeps Finding Itself on the Same Side as Regulators.”)

Competition between Greek City-States “Led to Specialization and Innovation”

(p. C8) Mr. Ober’s approach is theoretical, not narrative-driven. When he does discuss the specifics of classical history, in the second half of the book, he does so largely to support the theses he has developed in the first half about the key causes of Greece’s rise.
These causes, in Mr. Ober’s view, derived from the competitive world of small, self-governing city-states that emerged in Greece starting around 800 B.C. Competition between states led to specialization and innovation, as exemplified by the high-grade ceramics industry at Athens, and to a spirit of “rational cooperation” among the members of each polity (think of those ants). Within each state, self-governance created what Mr. Ober terms “rule egalitarianism”: a sense of fairness and security that “encouraged investment in human capital and lowered transaction costs.” The result was a rise not only in standards of living but also in civic pride, technological progress and refinement of artisanship.
. . .
It’s no accident that Mr. Ober’s terminology overlaps with the language of modern economics–“creative destruction” is a phrase he uses frequently. He wants to encourage comparisons between ancient Greece and the modern West. They offer two examples of “political and economic exceptionalism,” featuring both pluralistic government and the rapid growth of wealth.

For the full review, see:
James Romm. “Greeks and Their Gifts; Competition among self-governing city-states led to specialization, innovation and cooperation.” The Wall Street Journal (Sat., May 23, 2015): C8.
(Note: ellipsis added.)
(Note: the online version of the review has the date May 22, 2015.)

The book under review, is:
Ober, Josiah. The Rise and Fall of Classical Greece. Princeton, NJ: Princeton University Press, 2015.

“Secure in the Knowledge that She Has Other Opportunities”

(p. A11) . . . , Professor Higgins notes that it is Eliza’s “curbstone English that will keep her in the gutter to the end of her days.” He boasts that with a few months under his instruction, she could get a job “as a lady’s maid or a shop’s assistant.”
The next morning, Eliza appears at Professor Higgins’s doorstep to hire him to teach her English because she wants to be “a lady in a flow’r shop, ‘stead of sellin’ at the corner of Tottenham Court Road.” He accepts.
Note the assumptions. Eliza didn’t place her hope in new regulations for street-side flower mongering. For Eliza, upward mobility was about acquiring the skills she needed to get ahead, in this case proper English and the manners that went with it.
. . .
In the end, the only real leverage a worker has over a boss is her ability to tell him where to get off–secure in the knowledge that she has other opportunities. Which is exactly what Eliza Doolittle does at the end, when she’s acquired the English and manners that mean she no longer has to put up with the bullying of Professor Henry Higgins.

For the full commentary, see:
WILLIAM MCGURN. “MAIN STREET; Audrey Hepburn Teaches Economics; Progressives rushing to help New York nail-salon workers should rent a copy of ‘My Fair Lady’.” The Wall Street Journal (Tues., May 26, 2015): A11.
(Note: ellipses added.)
(Note: the online version of the commentary has the date May 25, 2015.)