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Stiglitz on Prizes
Stiglitz has a short piece in the New Scientist coming out in favor of prizes. There isn't much to the article that you don't already know and its actually more anti-patent than pro-prize still it's an interesting sign that prizes are being taken seriously in top economic circles.
Posted by Alex Tabarrok on September 20, 2006 at 07:05 AM in Economics | Permalink
Comments
"Intellectual property" is supported because it supports innovation.
Very effectively.
A legal CD costs $10, the same quality Free Market ('pirate') CD costs $1.
The $9 difference is almost a "tax" on the buyer sent directly to the seller & publisher & distributor & producer & studio & ... creator.
The gov't does NOT get that cash, so in that sense it's not a tax. (Though property which is copied is certainly not stolen -- the original owner still owns it.)
IPR is Intellectual Monopoly Protection.
Before junking the use of legally justified violence against peaceful, poor, info-sharing folk, there needs to be some other ways of supporting the great benefit of innovation.
Prizes, even tax-supported prizes, seem a better way to support innovation than IPR.
Note how few IPR supporters do any cost-benefit analysis in support. The cost of IPR enforcement is increasing with every computer CD & DVD burner sold. If the enforcement cost isn't already greater than the benefit, at some point it will be.
(Libertarians who think that violence should not be used to promote social goals, should not support legal violence to promote the goal of innovation; yet many/ most do. I no longer do.)
Posted by: Tom Grey - Liberty Dad at Sep 20, 2006 7:29:06 AM
Economists have taken prizes pretty seriously for a long time. My dissertation adviser more or less made his name back in the mid-1990s with work on prizes for innovation.
Posted by: Keith at Sep 20, 2006 7:59:14 AM
I do not understand why the ideas of prizes and IP rights are thought of as mutually exclusive. IP rights incentivise business risks, and R&D projects with high costs are adopted because of the prospect of an IP protected high payout.
This system is obviously bad for high-cost R&D projects with high social impact but low commercial payout. More of these types of projects would be adopted with a good “prize” system in place.
Posted by: Brent at Sep 20, 2006 11:14:53 AM
Weird... Ten minutes before reading this (thanks for the pointer!) I had finished drafting an editorial for Medical Hypotheses on the use of 'mega-prizes' in promoting medical therapeutic innovation. I came across the idea in a 1986 Nature commentary by my predecessor as editor, David Horrobin.
I don't see mega-prizes as replacing patents but filling in the gaps, where patenting is not possible.
The problem with prizes compared with patents, which Stiglitz doesnt address, is what happens after the prize. Patents provide an incentive to market and sell drugs (which is why pharmacetical corporations spend so much on sales and marketing), but a prize doesn't. The danger is that a discovery may be neglected if nobody can make money from it.
But my hope is that the prestige of a really big prize may stimulate demand for (eg) new medicines or technologies, so that money can be made from them.
Posted by: Bruce G Charlton at Sep 20, 2006 11:40:09 AM
Ah yes, Government Knows Best. Government knows what inventions humanity needs, and also knows exactly how much they're worth. Somewhere Hayek is either laughing or crying. And color me really scared when libertarians and smart-government types start agreeing on something.
I wonder if anyone has the ability to go back in time 10, 20, 50 or 100 years and tell us which of the plethora of inventions were "good" ones, which ones could have been foreseen before they were invented, and which of them had values which could have been foreseen with even a rough degree of estimation, let alone accuracy.
How many of the inventions of the past were serendipidous, or became more successful than anticipated, or less successful, or filled product niches that we didn't even know existed until they were invented?
BTW there are already "government prizes" in the form of research grants. The more results you get, the sounder your science, the more grants you get. It's a nice idea to establish big prizes for big ideas -- space travel, cancer cures, AIDS cures -- but given the thousands upon thousands of life-improving ideas generated every year by the world's population, it's an unrealistic fantasy to claim the government should be in the business of regulating invention.
I also loved Stiglitz's story about the Wright brothers getting into some snit and therefore delaying the development of the aircraft, concluding by saying the government had to intervene, implying that, of course, when it comes to inventions, Government Knows Best. It's intellectually dishonest at best, as the same problem exists with prizes. Conflicts are still conflicts, unless Stiglitz is suggesting government needs to resolve prize disputes by saying, "because I said so." Let's hear the libertarians argue in favor of that one.
Posted by: Henry at Sep 20, 2006 12:19:17 PM
Response to Henry.
The difference between prizes and research grants is that prizes are for achieved results whereas grants are for the process of research.
I would envisage prizes being given mainly by private institutions - such as the charities for specific diseases.
At present a breast cancer charity will fund what it regards as promising research into breast cancer. But they might alternatively stop giving grants for a few years, accumulate resources, and fund a mega-prize (100 000 dollars? 1 000 000 dollars?) for 'curing' breast cancer (with curing precisely defined).
This kind of prize would provide a quite different type of incentive from research grant funding.
Posted by: Bruce G Charlton at Sep 20, 2006 12:53:20 PM
Bruce G Charlton:
The problem with prizes compared with patents, which Stiglitz doesnt address, is what happens after the prize. Patents provide an incentive to market and sell drugs (which is why pharmacetical corporations spend so much on sales and marketing), but a prize doesn't.
Incentives to market and sell a drug once it has been created and tested are not a problem. If it were how do you explain generics itching to market and sell as soon as patent protection has lapsed, if not sooner?
Posted by: Mike Linksvayer at Sep 20, 2006 2:36:09 PM
Henry, do you need government sponsored monopolies to encourage entrepreneurs to make and sell, say, pizzas? Oranges? Bottled water?
So, no once the formula is there, you don't need government incentive to mass-produce and sell drugs, as all products (on markets where the government does not screw the free markets with government sponsored monopolies), entrepreneur will compete to provide them at the lowest possible cost meeting regulations, and take appropriate really free market leveled margins. As Mike said.
Now the question is how to get the formulaes in the first place, and prizes might well be vastly more economically efficient than cumbersome and corruption generating "intellectual property".
To quote someone who cannot be accused of favoring non free markets:
"""
Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...]
The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.
Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period.
"""
The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek
Posted by: Laurent GUERBY at Sep 20, 2006 3:47:40 PM
Laurent,
Tho I say it with respect, you're making a straw man. I said nothing about needing a government monopoly to produce anything. Your next statement however poses the question correctly: "Now the question is how to get the formulaes in the first place."
When you say "prizes might well be vastly more economically efficient than cumbersome and corruption generating 'intellectual property,'" you are making a guess.
I think a prize is nothing more than a government-controlled proxy for a patent monopoly. I think once a prize is reduced to a government-generated proxy for patent monopoly, all the same problems pertain to prizes as to monopolies, except that we also add the problem that the government can never know (a) what prizes are germaine, and (b) what values should be affixed to those prizes.
I can easily demonstrate the equivalence thus: A patent monopoly is the precise equivalent of a prize where every original idea is rewarded with the total amount of royalty income which would be generated by that idea for a certain period of time.
Thank you for the quote from Hayek, as it was enlightening and educational, but I see no connection whatsoever between that quote and a support for prizes. In fact his arguments could very well be used to argue against prizes. After all, a prize would also reward "anyone who hits upon a solution a moment before the next."
I must also take exception to drawing any conclusions from "great works of literature" or "works of reference." I am an internet programmer, and I am intimately familiar with the world of linux. In my opinion a great deal of open-source software is "chasing the tail-lights" of commercial software. Reference books are in a way doing the same thing. Wikipedia is useful because it is compiling information, not inventing it. The writer of a reference book is a copyist, not a creator. Wikipedia clarifies this point quite well when it enforces the requirement for full sourcing for every fact reported.
As to great works of literature, please forgive me but we are not all geniuses with uncontrollable creative impulses. Most inventions and copyrights are bestowed to working folks with a need to remunerate themselves. I could easily reformulate Hayek's concern, saying I wonder whether the elimination of patents would lead to "wasteful concentration of research ... where, in consequence of the law," anyone who steals an idea quickly enough and places it into his existing production system, "before the next[,] gains the right to its exclusive use for a prolonged period."
What I mean is this: We've all seen the cases of plagarism which occur from time to time, against famous authors. We've all heard Picasso say "good artists borrow, great artists steal." Tell me whether you find it hard to believe that in a world without copyright, the Disneys and Stephen Kings of the world would not troll the world of uncopyrighted material in order to recast it and sell it through their pre-existing "sales channels." Tell me who in this world would benefit more, the artist or the media conglomerate.
Posted by: Henry at Sep 20, 2006 6:47:51 PM
Henry, you cited Hayek in the first place, not me:
"Somewhere Hayek is either laughing or crying"
We're talking on economics, an activity that does not advertize any predictive power, so if you can offer other than guess about the future, then great for you! In the meantime, guesses from great thinker are often valuable.
Monopolies impose a permanent waste in lawyer fees, government employees, bystander casualties, etc... for all the duration of the monopoly (infinite in practice for copyrights, 20 years and more for patents).
Prizes do not have such a cost, don't you agree?
How is the government deciding that 20 years is the right term for all "inventions"? How is the government choosing what patent to grant or not (by staffing or not a domain)? Why is the government excluding surgical procedures from patenting and not others? Plenty of government deciding what's good, don't you agree?
I'm also a programmer, I make in the 6 digits and in my country only 7% of the IT workforce is working for "editors" (open source or not) thus depending on government sponsored monopolies, and I'm part of the remaining 93%. Note that I don't blame you, economists and media are totally ignoring this ratio when they talk about "necessary IP" and predict all the programmers starving without it.
Posted by: Laurent GUERBY at Sep 21, 2006 7:53:41 AM
An excellent article by Healthcare Economist on non-profit drug research and prizes :
http://healthcare-economist.com/2006/09/20/genius-a-non-profit-drug-company-wins-a-macarthur-award/
Posted by: Laurent GUERBY at Sep 22, 2006 5:10:16 AM
Henry: Most inventions and copyrights are bestowed to working folks with a need to remunerate themselves.
So what? When did the world start owing them a living?
If you cannot find a way to feed yourself with your writing or your inventing, without the aid of a government-enforced monopoly, of arbitrary length, on the use of ideas copied or derived from yours, then you need to find another line of work. Your need to remunerate yourself is not a claim on anyone else's pocketbook.
Henry: Tell me whether you find it hard to believe that in a world without copyright, the Disneys and Stephen Kings of the world would not troll the world of uncopyrighted material in order to recast it and sell it through their pre-existing "sales channels." Tell me who in this world would benefit more, the artist or the media conglomerate.
Who cares? The question is one of justice in property rights, not one of class solidarity. It's not the government's job to police academic honesty or creativity. Rooting out "plagiarists" is a job for critics, teachers, peer reviewers, and the reading/listening/viewing public, not lawyers, judges, and bureaucrats.
But, just out of curiosity, where do you think the media conglomerates will get the money to sustain their giant, centralized operations once they no longer can rely on monopoly profits from their own productions or the productions they acquire from others?
Posted by: Rad Geek at Sep 23, 2006 2:21:06 AM
Laurent:
I cited Hayek because I think it's foolish to believe government can do a better job of predicting the value of an invention than the private economy can. That is one of Hayek's main contributions. Your citation of Hayek does not change this, and in fact, as I demonstrated, if Hayek argues against intellectual property monopolies, his words can also be said to argue against prizes.
I do not agree that prizes do not have the costs you stated. The costs are the same, and, given the inefficiencies of government, may in fact be more. You are creating a government agency to invent and administer prizes, and you would still have the same application process for a prize as for a patent. In fact you may have more costs for a prize in the sense that a patent is just an idea, whereas a prize is only given if the benefit can be visibly demonstrated. Patent costs are mostly research and application. Someone would still need to do the same amount of research and application work to make sure the ideas are eligible. Prizes are government-administered patents. Period.
I do not agree that patents are "plenty of government deciding," at least not relative to giving prizes. The only thing the government is deciding in the case of a patent is a single number, which is the number of years the patent is valid. In the case of prizes, the government is deciding a great many more things, including -- and nobody yet has responded to this -- the value of the prize itself. Please remember the topic of this post, which is the contention that prizes are better than patents, which in my view is utterly absurd. On this issue, everything else is irrelevant except this simple question. I believe that patents are like spam prevention, in the sense that we may not like the system, but there's no better one.
On the other hand, if patents are outlawed, lawyers' costs will be replaced by security costs. Suddenly every corporation will need to have their own private armies with one guard posted in every cubicle. The costs of secrecy will mushroom.
Rad Geek:
Like Laurent you are responding to words out of context, to achieve rhetorical or semantic victory. The first comment you quoted was designed to nullify Hayek's argument that patents are unecessary because great literature didn't require them, which is an unfair and irrelevant observation. If you want to discuss patents in general, which I'm actually trying not to do, then you have to recognize that most patents are held by large corporations which employ many people, and in fact put money into those peoples' pockets. Without going any further in this direction, all I'm trying to say is that putting or taking money from peoples' pockets isn't as easy an issue as you're trying to make it.
The answer to your second question is extremely easy. Lifting patent protections means giving more benefit to those organizations which can sell commodities most effectively. Let's say for sake of argument that those organizations are the members of the S&P 500 on the day patents are outlawed. You've just concentrated more power in those companies' hands by telling them they can use the multi-billion-dollar salesforces to sell anything which anyone has created. The next Donald Trump or google.com will be the organization that can sell anything from anywhere to anyone.
If you want to turn the US into a manfuacturing economy, then go ahead and outlaw patents. If your desire for principle is so great, then please don't complain when you become a factory worker in a patent-less society where brains become less important than pure out-and-out execution.
Posted by: Henry at Sep 24, 2006 11:23:47 AM
Henry,
As a response to Hayek, your statement suffers from having misunderstood Hayek's central point, which has nothing to do with maximizing or sustaining the current quantitative output of literary works or inventions. What he said was this:
Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. ... Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period.
Both his discussion of copyright and his discussion of patents have to do with not only the quantity but the quality of the output. Just pointing to some folks who happen to be writing right now, or who happen to be inventing things right now, and saying "Without patents or copyrights these folks wouldn't be inventing or writing!" does not even begin to answer his objection. In fact he's quite explicit in the case of patents that he thinks a lot of the actually existing work encouraged by patent restrictions is misdirected or less than optimal. Thus your complaint about his focus on "great works of literature," etc. is misguided. If you think that maximizing quantity of output, or maximizing quantity of output from a particular group of people (e.g. "working folks with a need to remunerate themselves") then you would have some grounds to object to Hayek's maneuver. But you would need to give some argument for that position, which so far you have not.
It is, however, disingenuous of you to claim that you are discussing only Hayek, and not patents or copyrights in general. In the case of copyrights at least you made quite specific claims about the global economic effects that (for example) abolishing copyrights would have, which are independent of anything in particular that Hayek addressed.
Without going any further in this direction, all I'm trying to say is that putting or taking money from peoples' pockets isn't as easy an issue as you're trying to make it.
This is tendentious, to say the very least. I deny that allowing for a free market, and thus refusing to recognize arbitrary demands for monopoly rights, is appropriately described as "putting or taking money from people's pockets." And protectionist appeals to the poor working folks who will have to actually do the work of competing on price and quality are hardly going to move anyone who is serious about free market economics.
Lifting patent protections means giving more benefit to those organizations which can sell commodities most effectively.
To be precise, it does not mean "giving more benefit" to anyone. Free markets are opportunities, not gifts; what it means is stepping back and allowing those who can best sell the product to benefit from their own honest labor. (I think it's interesting, for one thing, that you treat "pure out-and-out execution," i.e. manufacturing and distributing and selling commodities, as something which doesn't require "brains." Ha ha ha.)
Now, I think that as a matter of economics, you are begging the question when you presume that "media conglomerates" or other "multi-billion-dollar" corporations are likely to be better than other companies at producing and distributing creative or inventive works. Since they have so much money and existing distribution channels, they may very well profit in the short term. (On the other hand, you need to keep in mind that there are several conglomerates in competition with each other, and their biggest sales opportunities would be in distributing copies of each other's products -- thus undermining the margins for all.) But in the long term, there is no reason to suppose that other players might not develop more efficient distribution channels, or that large-scale distributors will get products to local markets more cheaply than small-scale distributors. I think the long-run effects of abolishing IP restrictions would be to undermine the titans in the field, since today they (Disney, WB, BMG, Sony, Pfizer, GSK, etc.) depend on zealously guarded copyright and patent portfolios in order to generate those fat margins. There is no evidence at all that their product line or their internal culture is fit for competing in a market unencumbered by patent and copyright.
I also think it is gravely mistaken to suppose that abolishing patents or copyrights would reduce creative and technological fields into "a manufacturing economy," in which the dominant activity is simply manufacturing and distributing commodities based on other people's creation or invention. There are many ways for creative types to make a living other than exploiting grants of intellectual monopoly. I should hope if you ever hope to go into writing, for one, that you'll figure some of them out, because most writers have a very difficult time eating on the royalties (if any) from their writing. Some people pursue creative/inventive/whatever endeavors as a hobby while making their living at a day job. Others go into a line of work that supports their writing/research/whatever by other means (for example, by entering the academy). One can easily imagine that under a free market these strategies would continue to exist, and would indeed expand.
But all of this to one side, the more important point to me has little to do with economics, and a lot to do with ethics. Even if it turned out that a free market resulted in overwhelming market dominance by a few large manufacturers and distributors, that would be no reason to sustain copyrights or patents even one hour longer. Neither I nor you nor anybody else has the right to stop other people from making a living through honest labor -- i.e. rendering goods or services without employing force or fraud -- just so that we can guarantee a particular set of market arrangements or a particular standard of living for ourselves. Since both patents and copyrights depend on suppressing other people's right to make and sell copies of information they have freely obtained for an arbitrarily dictated length of time, they depend on just such an injustice. And I should hope that you, too, would rather work in a factory than do injustice to innocent people.
Posted by: Rad Geek at Sep 25, 2006 3:58:14 PM
For all the battles that can be fought, I find it amazing to see how much energy Libertarians devote to the discussion of intellectual property rights. There are legitimate concerns, esp related to the (systematic?) granting of dubious patents and the (arbitrary?) term extension of copyrights. But I am, rightfully so, not the one who prioritises any debate, and people should be free to write and devote as much time as they want to the issues they choose, etc.
The real issue here for me is AT (unjustifiably, in my opinion) honouring Stiglitz, stating that he resides in "top economic circles". For someone who now makes a living selling his absurd books to undergraduates who don't know any better, I think Stiglitz has lost any credibility that he once had, even as a Nobel winner. He was in Geneva around his time last year. Who was he hanging out with? Ralph Nader. That's not a joke.
Posted by: Alec van Gelder at Sep 27, 2006 5:45:52 AM
You can blame Stiglitz, but at the same time it is hard to find any other economist who has a "roomful of people on the edge of their seats" in the World Bank while cricitizing the actual globalisation in favor of "The" globalisation.
I think that his idea about prizes is not new (he admits this too), but what he forgets to mention is that solely prizes can not solve everything, and actual IP-rights have some benefits over prizes too. For this reason, although prizes can be a good solution for an AIDS vaccine and such, we need some non-prize incentives to foster innovation.
Posted by: V at Sep 27, 2006 6:35:39 AM
Henry: "I wonder if anyone has the ability to go back in time 10, 20, 50 or 100 years and tell us which of the plethora of inventions were "good" ones, which ones could have been foreseen before they were invented, and which of them had values which could have been foreseen with even a rough degree of estimation, let alone accuracy."
Very true. And that would be one reason why markets won't support research whose future value is uncertain.
Grants and prizes can fix that to some extent, in addition to the advantages of equitable distribution of benefits to society.
Sometimes poorly regulated grants might not be so bad either. :-)
Posted by: Sunil Bajpai at Sep 28, 2006 2:51:56 AM
For a grants-only system to work, you would have to trust the government to be:
honest, so that the grants programs aren't gamed to their friends
Able to predict the future, and know what will be valuable
Intelligent, in order to see the far future
Efficient, to prevent even bigger bottleneck than what we have now
Rich, since apparently the US is going to pay for all new US inventions with a US taxpayer prize. Then the rest of the world gets to profit from the invention for free.
And Stiglitz is an economist???? Obviously the prize for economics is as corrupt as the prize for peace. If the Nobel prize system can be this bad, you think a US bureaucratic system would be better?
Posted by: Smarty at Jun 22, 2008 11:24:57 AM
For a grants-only system to work, you would have to trust the government to be:
honest, so that the grants programs aren't gamed to their friends
Able to predict the future, and know what will be valuable
Intelligent, in order to see the far future
Efficient, to prevent even bigger bottleneck than what we have now
Rich, since apparently the US is going to pay for all new US inventions with a US taxpayer prize. Then the rest of the world gets to profit from the invention for free.
And Stiglitz is an economist???? Obviously the prize for economics is as corrupt as the prize for peace. If the Nobel prize system can be this bad, you think a US bureaucratic system would be better?
Posted by: Smarty at Jun 22, 2008 11:26:08 AM
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