Category: Incentives

Electronics Projects Were Wozniak’s “Passion” and “Pastime” and “Reward”

(p. 127) I think most people with day jobs like to do something totally different when they get home. Some people like to come home and watch TV. But my thing was electronics projects. It was my passion and it was my pastime.

Working on projects was something I did on my own time to reward myself, even though I wasn’t getting rewarded on the outside, with money or other visible signs of success.

Source:
Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.

Underwater Power Cables Maximize Profits and Improve Environment

TransBayCableSanFrancisco2010-04-17.jpg“Laying line in San Francisco for the Trans Bay Cable project, which submerged 33 miles of cable.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B1) Generating 20 percent of America’s electricity with wind, as recent studies proposed, would require building up to 22,000 miles of new high-voltage transmission lines. But the huge towers and unsightly tree-cutting that these projects require have provoked intense public opposition.

Recently, though, some companies are finding a remarkably simple answer to that political problem. They are putting power lines under water, in a string of projects that has so far provoked only token opposition from environmentalists and virtually no reaction from the larger public.
. . .
(p. B7) . . . , the underwater approach solves some intractable problems. In San Francisco, for example, old power plants that burn natural gas are about to be retired because a new transmission company has succeeded in running a line 33 miles across the San Francisco Bay.
Mr. Stern said his company’s Neptune Cable, which runs from Sayreville, N.J., to Levittown, N.Y., on Long Island, now carries 22 percent of Long Island’s electricity. His company is trying to complete a deal for a cable that would run from Ridgefield, N.J., to a Consolidated Edison substation on West 49th Street in Manhattan.
Those two cables were not motivated primarily by environmental goals — they are meant to connect cheap generation to areas where power prices are high. Mr. Stern’s company, PowerBridge, is now considering two renewable energy projects, however. One cable would connect proposed wind farms on the Hawaiian islands of Molokai and Lanai to the urban center on Oahu, and another would bring wind power from Maine along the Atlantic coast to Boston.

For the full story, see:
MATTHEW L. WALD. “A Power Line Runs Through It; Underwater Cable an Alternative to Electrical Towers.” The New York Times (Weds., March 17, 2010): B1 & B7.
(Note: ellipses added.)
(Note: the online version is dated March 16, 2010 and has the shorter title “Underwater Cable an Alternative to Electrical Towers.”)

Myhrvold Innovates in Financing Innovation

MyhrvoldNathanIntellectualVentures2010-03-01.jpg “Nathan Myhrvold, chief of Intellectual Ventures, says patent holders are being treated unfairly.” Source of caption and photo: online version of the NYT article quoted and cited below.

When Nathan Myhrvold was at Microsoft, he helped Bill Gates write The Road Ahead, a well-written book full of realistically optimistic speculation, forecast and analysis.
Besides his main initiative, discussed below, he has recently been in the news due to his bold and controversial suggestion for how to cheaply solve global warming.

(p. B1) BELLEVUE, Wash. — Nathan Myhrvold wants to shake up the marketplace for ideas. His mission and the activities of the company he heads, Intellectual Ventures, a secretive $5 billion investment firm that has scooped up 30,000 patents, inspire admiration and angst.

Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”
White hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace for intellectual capital. Its rise comes as Congress is considering legislation, championed by large technology companies, that would make it more difficult for patent holders to win large damage awards in court — changes that Mr. Myhrvold has opposed in Congressional testimony and that his company has lobbied against.
. . .
(p. B10) The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” said Josh Lerner, an economist and patent expert at the Harvard Business School.
Mr. Myhrvold certainly thinks so. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he said in his offices here.
Mr. Myhrvold presents his case at length in a 7,000-word article published on Thursday in the Harvard Business Review. “If we and firms like us succeed,” he writes, “the invention capital system will turbocharge technological progress, create many more new businesses, and change the world for the better.”
In the article and in conversation, Mr. Myhrvold describes the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.
His antagonists, he says, are the “cozy oligarchy” of big technology companies like I.B.M., Hewlett-Packard and others that typically reach cross-licensing agreements with each other, and then refuse to deal with or acknowledge the work of inventors or smaller companies.
. . .
Mr. Myhrvold personifies the term polymath. He is a prolific patent producer himself, with more than 100 held or applied for. He earned his Ph.D. in physics from Princeton and did postdoctorate research on quantum field theory under Stephen Hawking, before founding a start-up that Microsoft acquired.
He is an accomplished French chef, who has also won a national barbecue contest in Tennessee. He is an avid wildlife photographer, and he has dabbled in paleontology, working on research projects digging for dinosaur remains in the Rockies.

For the full story, see:
STEVE LOHR. “Turning Patents Into ‘Invention Capital’.” The New York Times (Thur., February 18, 2010): B1 & B10.
(Note: ellipses added.)
(Note: the online version of the article is dated February 17, 2010.)

The Bill Gates book is:
Gates, Bill. The Road Ahead. New York: Viking Penguin, 1995.

Myhrvold’s Harvard Business Review essay is:
Myhrvold, Nathan. “The Big Idea: Funding Eureka!” Harvard Business Review 88, no. 2 (March 2010): 40-50.

MyhrvoldNathanFreezeDryMachine2010-03-01.jpg “Nathan Myhrvold with a machine that freeze-dries food. Intellectual Ventures so far has paid $315 million to individual inventors.” Source of caption and photo: online version of the NYT article quoted and cited above.

Heretics to the Religion of Global Warming

SuperFreakonomicsBK.jpg

Source of book image: online version of the WSJ review quoted and cited below.

(p. A19) Suppose for a minute–. . . –that global warming poses an imminent threat to the survival of our species. Suppose, too, that the best solution involves a helium balloon, several miles of garden hose and a harmless stream of sulfur dioxide being pumped into the upper atmosphere, all at a cost of a single F-22 fighter jet.

. . .

The hose-in-the-sky approach to global warming is the brainchild of Intellectual Ventures, a Bellevue, Wash.-based firm founded by former Microsoft Chief Technology Officer Nathan Myhrvold. The basic idea is to engineer effects similar to those of the 1991 mega-eruption of Mt. Pinatubo in the Philippines, which spewed so much sulfuric ash into the stratosphere that it cooled the earth by about one degree Fahrenheit for a couple of years.
Could it work? Mr. Myhrvold and his associates think it might, and they’re a smart bunch. Also smart are University of Chicago economist Steven Levitt and writer Stephen Dubner, whose delightful “SuperFreakonomics”–the sequel to their runaway 2005 bestseller “Freakonomics”–gives Myhrvold and Co. pride of place in their lengthy chapter on global warming. Not surprisingly, global warming fanatics are experiencing a Pinatubo-like eruption of their own.
. . .

. . . , Messrs. Levitt and Dubner show every sign of being careful researchers, going so far as to send chapter drafts to their interviewees for comment prior to publication. Nor are they global warming “deniers,” insofar as they acknowledge that temperatures have risen by 1.3 degrees Fahrenheit over the past century.
But when it comes to the religion of global warming–the First Commandment of which is Thou Shalt Not Call It A Religion–Messrs. Levitt and Dubner are grievous sinners. They point out that belching, flatulent cows are adding more greenhouse gases to the atmosphere than all SUVs combined. They note that sea levels will probably not rise much more than 18 inches by 2100, “less than the twice-daily tidal variation in most coastal locations.” They observe that “not only is carbon plainly not poisonous, but changes in carbon-dioxide levels don’t necessarily mirror human activity.” They quote Mr. Myhrvold as saying that Mr. Gore’s doomsday scenarios “don’t have any basis in physical reality in any reasonable time frame.”
More subversively, they suggest that climatologists, like everyone else, respond to incentives in a way that shapes their conclusions. “The economic reality of research funding, rather than a disinterested and uncoordinated scientific consensus, leads the [climate] models to approximately match one another.” In other words, the herd-of-independent-minds phenomenon happens to scientists too and isn’t the sole province of painters, politicians and news anchors

.

For the full commentary, see:
BRET STEPHENS. “Freaked Out Over SuperFreakonomics; Global warming might be solved with a helium balloon and a few miles of garden hose.” The Wall Street Journal (Tues., OCTOBER 27, 2009): A19.
(Note: ellipsis added.)

“A Foolish Faith in Authority Is the Worst Enemy of Truth”

(p. A21) Several years ago I grew concerned about my postmenopausal mother’s risk of osteoporosis. I tried to convince her to initiate hormone replacement therapy. She didn’t listen to me. Instead, she spoke with her gynecologist, who–contrary to best medical evidence at the time–recommended against such treatment. I would eventually be thankful my mother listened to the gynecologist who had known her for decades instead of me and the published medical reviews I was relying on. Some years later my mother was diagnosed with early breast cancer. Had she been on estrogen replacement, it is likely that her tumor would have progressed more rapidly. The gynecologist likely saved my mother’s life.

Studies published in the medical literature are mostly produced by academics who face an imperative to publish or watch their careers perish. These academics aren’t basing their careers on their clinical skills and experiences. Paradoxically, if we allow the academic literature to set guidelines for accepted practices, we are allowing those who are often academics first and clinicians second to determine what clinical care is appropriate.
Consciously or not, those who provide the peer review for medical journals are influenced by whether the work they are reviewing will impact their standing in the medical community. This is a dilemma. The experts who serve as reviewers compete with the work they are reviewing. Leaders in every community, therefore, exert disproportional influence on what gets published. We expect reviewers to be objective and free of conflicts, but in truth, only rarely is that the case.
Albert Einstein once noted that “a foolish faith in authority is the worst enemy of truth.”

For the full commentary, see:

NORBERT GLEICHER. “‘Expert Panels’ Won’t Improve Health Care; Government reliance on medical studies will make it harder to discard false prophecies and dogmas.” The Wall Street Journal (Mon., October 19, 2009): A21.
(Note: the online version of the commentary is dated Sun., Oct. 18.)

Health Care Incentives and Information Improve When Patients Are Payers

Nobel Prize winning economist Vernon Smith sees that the current health care system is an incentive and information “nightmare.” The third parties, who pay, have neither the incentive nor the information to reward the providers who do a good job. And patients, who have the information, do not have the power or incentives to reward those who do a good job. And since providers are not being rewarded for doing a good job, they will only avoid becoming cynical bureaucrats as long as they are mission-driven saints.
A better system, that goes a long way toward Smith’s “solution,” has been suggested by Susan Feigenbaum, who suggests that third parties provide payments directly to patients, who then may choose what services to buy from which providers.
Here is the core of Smith’s analysis:

(p. A11) The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party–the insurance company or the government–is paying A for it.

This structure defines an incentive nightmare.
. . .

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

For the full commentary, see:
VERNON L. SMITH. “The ABC Dilemma of Health Reform; Third-party payment creates a big incentive problem.” The Wall Street Journal (Sat., OCTOBER 16, 2009): A11.
(Note: ellipsis added.)

Feigenbaum’s prescient suggestion for reform can be found in:
Feigenbaum, Susan. “Body Shop’ Economics: What’s Good for Our Cars May Be Good for Our Health.” Regulation 15, no. 4 (Fall 1992): 26-27.

Amazon Rebels Against Hawaii Tax

After Amazon’s rebellion, summarized in the quote below, the Governor of Hawaii vetoed the tax, and Amazon has now invited its former affiliates to rejoin the program.
Lesson: sometimes entrepreneurial enterprise can fight the government, and win.

(p. B7) Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.

Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

For the full story, see:
GEOFFREY A. FOWLER. “Amazon Cuts Ties to Affiliates in Hawaii.” Wall Street Journal (Weds., JULY 1, 2009): B7.

Democrats Continue Earmarks for Those Who Donated to Their Campaigns

(p. A5) WASHINGTON — A House panel approved a big Pentagon spending bill this week that included nearly 150 items tucked in by lawmakers on behalf of companies and other entities whose employees donated to their campaigns.

The Democratic Congress and President Barack Obama swept into power on a promise to reform the process of lawmakers trying to dictate in detail how funds are spent, known as “earmarks.” When Mr. Obama signed a spending bill for the current fiscal year in March, he said the earmark-laden legislation should be an “end to the old way of doing business, and the beginning of a new era of responsibility and accountability.”
But as lawmakers work their way through spending bills for the next fiscal year, which begins Oct. 1, earmarks appear alive and well — including those written for companies, foundations, and universities whose employees and political-action committees gave money to the campaigns of congressmen doing the earmarking.
The $636.3 billion 2010 defense-spending bill passed Wednesday by the House Appropriations Committee includes more than 1,100 earmarks, totaling more than $2.7 billion.
Members of the Defense Appropriations Subcommittee — the 18 members of Congress who wrote the bill — secured a total of 148 earmarks worth $461 million for entities whose employees have given $822,765 in campaign donations to those lawmakers since 2007. The data were compiled by the nonpartisan Taxpayers for Common Sense, which analyzed nearly 400 earmarks.

For the full story, see:
JAKE SHERMAN. “Bill Shows Earmarks Are Alive and Well.” Wall Street Journal (Sat., JULY 25, 2009): A5.

The Case for Patent System Reform

(p. A13) The Patent Office now gets some 500 million applications a year, leading to litigation costs of over $10 billion a year to define who has what rights. As Judge Richard Posner has written, patents for ideas create the risk of “enormous monopoly power (imagine if the first person to think up the auction had been able to patent it).” Studies indicate that aside from the chemical and pharmaceutical industries, the cost of litigation now exceeds the profits companies generate from licensing patents.

For the full commentary, see:

L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Why Technologists Want Fewer Patents.” The Wall Street Journal (Mon., JUNE 15, 2009): A13.

Our “Patently Absurd” Patent System

(p. A15) The Founders might have used quill pens, but they would roll their eyes at how, in this supposedly technology-minded era, we’re undermining their intention to encourage innovation. The U.S. is stumbling in the transition from their Industrial Age to our Information Age, despite the charge in the Constitution that Congress “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
. . .

Both sides may be right. New empirical research by Boston University law professors James Bessen and Michael Meurer, reported in their book, “Patent Failure,” found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). Since the 1980s, patent litigation has tripled and the probability that a particular patent is litigated within four years has more than doubled. Small inventors feel the brunt of the uncertainty costs, since bigger companies only pay for rights they think the system will protect.
These are shocking findings, but they point to the solution. New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.
Our patent system for most innovations has become patently absurd. It’s a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

For the full commentary, see:
L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Patent Gridlock Suppresses Innovation.” Wall Street Journal (Mon., JULY 14, 2008): A15.
(Note: ellipsis added.)

“Clear Relationship in Rice Farming Between Effort and Reward”

(p. 236) What redeemed the life of a rice farmer, however, was the nature of that work. It was a lot like the garment work done by the Jewish immigrants to New York. It was meaningful. First of all, there is a clear relationship in rice farming between effort and reward. The harder you work a rice field, the more it yields. Second, it’s complex work. The rice farmer isn’t simply planting in the spring and harvesting in the fall. He or she effectively runs a small business, juggling a family workforce, hedging uncertainty through seed selection, building and managing a sophisticated irrigation system, and coordinating the complicated process of harvesting the first crop while simultaneously preparing the second crop.

And, most of all, it’s autonomous. The peasants of Europe worked essentially as low-paid slaves of an aristocratic landlord, with little control over their own destinies. But China and Japan never developed that kind of oppressive feudal system, because feudalism simply can’t work in a rice economy. Growing rice is too complicated and intricate for a system that requires farmers to be coerced and bullied into going out into the fields each morning. By the fourteenth and fifteenth centuries, landlords in central and Southern China had an almost completely hands-off relationship with their tenants: they would collect a fixed rent and let farmers go about their business.
“The thing about wet-rice farming is, not only do you (p. 237) need phenomenal amounts of labor, but it’s very exacting,” says the historian Kenneth Pomerantz. “You have to care. It really matters that the field is perfectly leveled before you flood it. Getting it close to level but not quite right makes a big difference in terms of your yield. It really matters that the water is in the fields for just the right amount of time. There’s a big difference between lining up the seedlings at exactly the right distance and doing it sloppily. It’s not like you put the corn in the ground in mid-March and as long as rain comes by the end of the month, you’re okay. You’re controlling all the inputs in a very direct way. And when you have something that requires that much care, the overlord has to have a system that gives the actual laborer some set of incentives, where if the harvest comes out well, the farmer gets a bigger share. That’s why you get fixed rents, where the landlord says, I get twenty bushels, regardless of the harvest, and if it’s really good, you get the extra. It’s a crop that doesn’t do very well with something like slavery or wage labor. It would just be too easy to leave the gate that controls the irrigation water open a few seconds too long and there goes your field.”

Source:
Gladwell, Malcolm. Outliers: The Story of Success. New York, NY: Little, Brown, and Co., 2008.
(Note: italics in original.)