Is it okay to copy? Intellectual property, learning and development

In Tuesday’s post on China’s industrial policy I mentioned the country’s lack of enforcement of Intellectual Property Rights (IPR) as a feature of its development. The US in particular, but also other rich countries, have complained about this for many years.

IPR policy, such as the creation of patents, is intended to encourage innovation by allowing firms to reap profits from the creation of new knowledge and therefore provide them with incentives to innovate. This sounds like a good thing. But managing an IPR regime requires careful judgement. If new ideas are protected for only a short period, firms may not have sufficient monetary incentives to innovate; if they are protected for too long, competition will be stifled and the diffusion of the innovation across the relevant sector or economy, as rival firms compete for a share of the market by copying or adapting it, will be slowed.

Badly designed IPR regimes can therefore slow growth in economy-wide productivity. Innovating firms often have an incentive to lobby policymakers to introduce lengthy and comprehensive patent protection, to their benefit, but to the detriment of the economy and society as a whole. Continue reading

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Industrial policy and Chinese development

The rapid growth and transformation of the Chinese economy since 1978, when policymakers began a programme of economic reforms, has been extraordinary. Up until the last few years, GDP growth averaged around 10% per year, lifting hundreds of millions out of poverty. This represents the largest episode of poverty reduction in human history. China, as the largest manufacturing nation, has become the ‘workshop of the world’.

With a population of 1.4 billion, and an economy relatively open to international trade, these changes have and will continue to have an enormous impact on the rest of the rest of the world. For this reason, we should take a great interest in China’s continuing evolution.

Donald Trump, both on the campaign trail and since becoming US President, has placed great emphasis on getting some sort of ‘better deal’ between the US and Chinese economies. His administration has criticised China for taking advantage of the US on trade and the use of technology. But should China’s rise be a worry in these respects? Or is the US being hypocritical? In fact today’s rich countries all intervened in the economy and used forms of trade, industrial and technology policy to promote their growth and enable periods of ‘catch up’ with those at the frontier. China has been no exception. Continue reading

Mariana Mazzucato on innovation and the creation of value

A very brief interview on YouTube with Professor Mariana Mazzucato, who specialises in the economics of innovation. Admittedly she is plugging her new book The Value of Everything: Making and Taking in the Global Economy, but she makes a good case that we should have more of an appreciation for the role of the state, in partnership with the private sector, in driving innovation under capitalism. She argues that we must use that partnership to promote greater and more widely-shared prosperity.

Historically the state has often been a major player in funding, researching and developing new technologies, not least those behind the smartphone, as she describes in The Entrepreneurial State. I hope to read her new book during the next few weeks. In the meantime, a critical review by Marxist Michael Roberts can be found here.

 

Useful bubbles

Plenty of economists are critical of the apparent irrationality of financial bubbles, which have occurred throughout the history of capitalism. That they recur despite the efforts of governments to regulate the markets and prevent their worst excesses suggests that, at least to some degree, they are inevitable.

Alan Greenspan, former chair of the Federal Reserve, famously termed the dot-com bubble in the 1990s a bout of “irrational exuberance”.

In an interesting and iconoclastic piece written back in 2004, John Eatwell of Cambridge University considered the possibility of what he termed “useful bubbles”.  In his own words, he was attempting to “row against [a] powerful tide of condemnation”, but was defining “useful in a very limited way – that is, as producing some positive consequences”, despite the potential for panics and crashes. Continue reading

Michael Hudson on The American School of Political Economy

JisforJunkEconMore from iconoclast Professor Michael Hudson’s book J is for Junk Economics (p.30-32). For a more detailed account, I can recommend his book America’s Protectionist Takeoff 1815-1914, which I have posted on here.

“American School of Political Economy: The northern economists who focused on protective tariffs, infrastructure investment and a national bank to promote industrial and agricultural technology before and after the Civil War (1861-65). Mathew and Henry Carey, Henry Clay and William Seward among the Whigs and, after 1853, the Republicans, provided the economic policy that enabled America to industrialize and overtake England. They also emphasized the positive effect of rising wage levels and living standards on the productivity that made the American economic takeoff possible. Every major Northern politician and region was associated with a major economist: Alexander Everett for Daniel Webster and other Bostonians; Calvin Colton for Henry Clay; the Careys for Pennsylvania industrialists; and E. Peshine Smith for Seward and the Republicans. They developed the logic for tariff protection as opposed to Ricardian free-trade theory, and for government-sponsored internal improvements and a national bank to finance industry and achieve monetary independence from Britain.

It is testimony to the censorial power of subsequent free-trade ideology that these writers make no appearance in histories of economic thought. Historians have also ignored them, focusing on the Democratic Party (which meant mainly the South seeking to add slave states). At issue was whether the United States would suffer deflation and monetary and trade dependency on Britain, or would become independent. The American School opposed westward expansion and Manifest Destiny, and also opposed the Anglophilia of free traders and slave owners. The latter demanded monetary deflation to prevent industrialization so as to keep food prices low (and hence the cost of feeding slaves).

When the Civil War brought the Republicans to power, the American School found that the most prestigious colleges – founded originally to train the clergy – simply taught mainstream British free trade economics (largely because New England and southern seaboard schools favored free trade). The path of least intellectual resistance was to create a new set of schools – business schools and state land-grant colleges.

A central tenet of the American School was technological optimism in contrast to the Dismal Science of Ricardo and Malthus based on diminishing returns in agriculture and overpopulation leading to poverty. Also central was the Economy of High Wages doctrine: “It is not by reducing wages that America is making her conquests, but by her superior organization, greater efficiency of labor consequent upon the higher standard of living ruling in the country. High-priced labor countries are everywhere beating ‘pauper-labor’ countries.”

By the late 19th century nearly all the major American economists studied in Germany and followed the Historical School. Returning to America, they developed the Institutionalist School to explain why the United States should follow a different economic path from free-trade Britain. They continued to elaborate the logic for the protective tariffs that were nurturing American industry, as well as for public support for internal infrastructure improvements so as to create a low-cost competitive US economy. Most notable was Simon Patten, the first professor of economics at the Wharton School at the University of Pennsylvania. He taught protectionist trade theory and led economists into the discipline of sociology to analyze what he called the Economy of Abundance that resulted from the increasing returns in industry and agriculture.

When the United States achieved world industrial and financial dominance after World War I, it deterred other countries from protecting their own industry and agriculture – while continuing to protect its own. This about-face emulated British experience in urging free trade on other countries so as to make them dependent. This free-trade logic remains the buttress of today’s financial austerity and privatization policies imposed on debtor economies by the United States, the World Bank, and the International Monetary Fund. These policies are the opposite of America’s own protectionist takeoff, the Economy of High Wages Doctrine and the Economy of Abundance that powered its rise to global economic supremacy. The lessons of the American School of Political Economy provide a more realistic model for other countries to emulate.”

How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

Falling cost of renewables will challenge Trump’s plan for coal jobs

This short interview from the Real News Network illustrates the progress of clean energy generation in the US, compared with dirtier sources. The argument is that the cost of renewables is falling fast, such that they are becoming cheaper than coal-fired generation, which Mr Trump has promised to support. Cleaner sources also have positive spillover effects on health, known in economics as a positive externality.

The logic of market forces has probably been helped along by industrial policies, from Obama’s Clean Power Plan to the Chinese government, which has promoted the development of its solar panel industry. But if clean energy becomes cheaper than dirty energy, surely a Republican president looking for a good deal can’t argue with that.