Tyler Cowen's Blog, page 544

Defending Independent Invention

In the minds of the public someone who infringes a patent is like a plagiarist or a thief–the infringer has copied someone else's work or, even worse, stolen their intellectual property. In reality, patent infringement has very little to do with copying or theft. Here's how I described what is probably closer to the paradigmatic case of patent infringement in Launching the Innovation Renaissance:

Two inventors, Kelly and Pat, work independently, neither aware of the other's existence. Kelly patents first. Under the present law, if Pat wants to sell or even use his own invention, he must pay Kelly a license fee (!) even though Pat's idea came from his own head and no other.

If independent invention were uncommon this type of case wouldn't be important but independent invention is very common. Classic cases include Newton and Leibniz with the calculus, Alexander Graham Bell, Elisha Gray and Johann Philipp Reis with the telephone, Ohain, Campini, and Whittle with the jet engine and so on. And if independent invention  is common with great discoveries and inventions then it is surely much more common with ordinary innovations. As a result, it's not surprising that most patent cases don't even allege copying.

Independent invention should be a defense in a patent infringement lawsuit. An independent invention defense would allow Kelly to exclude imitators but would prevent Kelly from excluding an independent inventor such as Pat.

Inventors should not have to pay to use their own ideas! An independent invention defense is not only just, it also has good economic properties. An independent invention would create more competition. On the one hand, this does reduce the "pot of gold" incentive to create new ideas, the winner of a patent race might have to sell as a duopolist rather than a monopolist.  In this case, however, there are several reasons why we wouldn't expect the number of ideas to fall and innovation could even rise.

First, firms today are often surprised to find that they are being sued for patent infringement. An independent-inventor defense would give inventors greater security in their ideas, thus increasing the incentive to invest. In this age of cumulative innovation often what innovators want most is the security that they can build on what they have produced already. Lawsuits and associated transaction costs would also be reduced.

Second, the type of inventions that are most likely to be independently invented are those with high value relative to their cost. Thus, an independent-invention defense would automatically tend to offer smaller rewards to low-cost innovations and larger awards to more costly innovations, this is exactly the optimal rule discussed in my paper Patent Theory versus Patent Law (pdf) but unlike the system described in that paper it does not require anyone to examine an inventor's costs.

The patent system is supposed to be about increasing the progress of science and the useful arts but to often it ends up cudgeling the very people it is meant to protect, the independent inventors.

Addendum: Joe Mullin has a good post on copying and patent as does libertarian patent attorney Stephan Kinsella. Samson Vermont, my colleague at GMU law, has a longer paper on the independent inventor defense that discusses details of implementation.

Investing in Greece: Only for the Filthy Rich

If a small company wants to sell shares to investors it must demonstrate to the SEC that the investors are "accredited," basically wealthy, or otherwise it must go through a long and burdensome process to make an offering to the public. According to one account, Greece has considerably more peculiar requirements:

Antonopoulos and his partners spent hours collecting papers from tax offices, the Athens Chamber of Commerce and Industry, the municipal service where the company is based, the health inspector's office, the fire department and banks. At the health department, they were told that all the shareholders of the company would have to provide chest X-rays, and, in the most surreal demand of all, stool samples.

Greek banks were not much better:

Once they climbed the crazy mountain of Greek bureaucracy and reached the summit, they faced the quagmire of the bank, where the issue of how to confirm the credit card details of customers ended in the bank demanding that the entire website be in Greek only, including the names of the products.

"They completely ignored us, however much we explained that our products are aimed at foreign markets and everything has to be written in English as well," said Antonopoulos.

Take this with a grain of salt but the World Bank does rank Greece 135th in the world (186 countries ranked) in ease of starting a business.

Facts about the United Kingdom

Despite a 25 per cent devaluation of sterling, UK exports to Asia in the last three years have grown at a slower rate than those from Greece and Spain. In 2011, per capita gross domestic product in Ireland was greater than that in the UK. Meanwhile, the role of the state in the UK economy has grown and taxes have risen.

…More generally, individual risk and effort is not rewarded when the UK government share of GDP has risen from 38 per cent in 1999 to 51 per cent in 2011, the effective top rate of tax is over 50 per cent, and CPI inflation for the last five years has averaged 3.5 per cent.

That is from MP Liam Fox, more at the link.  Elsewhere (gated, at The London Times) I have written that the UK is especially vulnerable to The Great Stagnation.

Here is Tim Worstall on the Laffer Curve in the UK.

The incentive effects of marginal tax rates

Christina and David Romer have a new paper (pdf), focusing on the interwar era:

This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.

For the pointer I thank Ilya Novak.  I have not yet read the paper.

Greek markets in everything

It's being called the "negative salary": Due to austerity measures in Greece, it's being reported that up to 64,000 Greeks will go without pay this month, and some will have to pay for having a job. Numbers in austerity reports have usually reflected figures in the millions, since they reflect industry-wide cuts (i.e.  a 537-million euro cut to health and pension funds). And plans of cutting minimum wage by up to 32% is all but a given in the country. Today's "negative salary" deal—which could have government employees returning funds— reveals the real human impact of the austerity measures.

Here is more.

Assorted links

1. New Carl Zimmer project on science eBook reviews.

2. Empirical tests of how much "cold start" is a problem in labor economics.  From this general blog on on-line labor markets and their implications.

3. Markets in everything: dog TV.

4. NYT symposium on the farm bill, including yours truly.

5. Whorfian economics.

6. CrookedTimber is running a symposium on Graeber's debt book.

7. Early John Nash on cryptography, written to the NSA.

Unemployment Insurance and Disability Applications

More than 8.5 million workers are now collecting disability insurance, in other words almost 6% of the labor force is officially disabled. Perhaps not surprisingly, disability applications shot up just as unemployment benefits started to exhaust.

Applications are often denied so disability beneficiaries do not follow applications immediately. Denied applicants, however, often contest and apply again so eventually 50-60% of those who apply will typically enter the disability rolls and start to collect. Far fewer will ever exit the rolls, at least not by way of a job.

Since 1995 the number of disabled workers has doubled and expenditures have increased even faster than disabled workers, tripling since 1995. The increase in workers receiving disability insurance has come at the same time as the US working age population has become healthier. A large fraction of the increase in disability has come from increases in hard-to-verify back pain and mental problems (see Autor and Duggan and more recently Autor).

After the 2001 recession, disability applications also shot up and they never fell back to their old levels. We may be reaching a new, permanently higher, plateau.

Disabled workers do not count as unemployed, they have been bought out of the labor force.

The conservative critique of unemployment insurance used to be that it discouraged people from looking for work. The modern conservative response may be that it encourages people to not become disabled.

You might be irrational if…

Philosopher Michael Huemer on political irrationality and how to combat it:

 

A message for all our readers in the United Kingdom

From Scott Sumner, but endorsed by me in full:

Take the current situation in the UK.  If I'm not mistaken, the British political system is different from that in America.  British governments are basically elected dictatorships, with no checks and balances.  Even though the Bank of England is independent, the government can give it whatever mandate it likes.  If I'm right then both fiscal and monetary policy are technically under the control of the Cameron government.

So I read the UK austerity critics as saying:

"Because you guys are too stupid to raise your inflation target to 3%, or to switch over to NGDP targeting, fiscal austerity will fail.  We believe the solution is not to be less stupid about monetary policy, but rather to run up every larger public debts."

Is that right?  Is that what critics are doing?

Some will argue that my views are naive, that Cameron would be savagely attacked for a desperate attempt to print money as a way of overcoming the failures of his coalition government.  Yes, but by whom?  Would this criticism come from Ed Balls?  Perhaps, but in that case he would essentially be saying:

"It's outrageous that the Cameron government is trying to use monetary stimulus to raise inflation from 2% to 3%, whereas they should be using fiscal stimulus to raise inflation from 2% to 3%."

I'm sorry to have to repeat this over and over again, but what 99% of pundits on both sides of the Atlantic are treating as a debate about "stimulus" and "austerity" is actually a debate about stupidity.  I'm not saying the pundits are stupid (Krugman certainly understands what I'm saying) but rather they are addressing their audience as if the audience was stupid.

Don't talk down to Cameron and Osborne!  Don't say "austerity will fail."  Say "austerity will work, but only if the BOE becomes much more aggressive, otherwise it will fail."  That sort of advice would be USEFUL.  Instead we are getting a bunch of pundits getting ego boosts because they can say "I told you so."

Scream it from the rooftops!

*The Failure of Judges and the Rise of Regulators*

That is the new book by Andrei Shleifer, and it collects his major and very important writings on regulation and law and economics, many with notable co-authors.  Some of these papers have been discussed previously on MarginalRevolution.  If you wish to own those papers, this is your book.