Libertarians and the Commons are Friends

It is no secret that libertarians profess freedom, rule of law, and property rights. Unfortunately, the latter tends to be an immediate reaction to the commons. As the story goes – disputes over shared property are solved by strong application of property rights and binding contracts. I’m not convinced.

We’re missing two things: (1) the commons have their foundation in voluntary collective-action governance; and (2) the commons can be conceived as a market. If you were to take ‘commons’ out of the last two sentences, then most libertarians would be happy. If you put it back in, there are calls for strong property rights to solve self-interested individuals from themselves.

Let’s talk about this for a minute.

Collective-action, by definition, is voluntary cooperation between private agents in civil society. Yes, voluntary. Sounds nice, doesn’t it? These institutions are complex environments characterised by implicit norms, tacit rules, and operational level decisions. They are not a free-for-all. Nor are they a form of re-distribution.

If you disagree with the commons as a voluntary system of institutional rules to share resources, then you’re going to have to disagree with firms, too. That’s what firms are – they coordinate and share resources under rules.

Collective-action governance is one of the purest forms of freedom. Contracts are often unwritten and implicit. Punishment mechanisms are set up by the agents themselves. Rules are specifically tailored to the social dilemma at hand. There’s little need for state protection of property rights through the courts. A well developed and evolved commons institution is an island of rules near absent from state pressures.

Sounds pretty free to me.

Further, the commons can be conceived as a form of market. Viewing the commons as a market seems counter-intuitive, yet it is not entirely crazy. They just look different; we’re not very good at understanding different institutions. The lines between market and non-market transactions are blurred.

This is best demonstrated through example: the innovation commons. The innovation commons are an emergent institution mixing technology and local Hayekian market knowledge through shared collective-action governance rules.

We have to remember that shared property is property, too. It’s not private individual property, like your home – but it is still property. There’s still a bundle of rights. There’s still exchanging of these bundles. There’s still a cost of entering and participating in the commons (often prior tacit knowledge or reputation). Sounds pretty market-like to me; and libertarians love markets.

Let’s take a more specific example – hackerspaces. Hackerspaces are collective-action institutions where private agents share local market knowledge, coalescing around certain technologies. The cost to enter the commons is the value of prior tacit knowledge. What’s exchanged is knowledge and technology. The exchange just isn’t in dollars, it’s through your contribution and cooperation (see a recent paper by Kealey and Ricketts 2014, on contribution goods).

The commons are not a free-for-all utopian commune. They’re an institution that appears effective at coordinating knowledge. You see, the commons and libertarians should be friends. We just need to take a step back before we (once again) label the commons as a remorseless tragedy and privatise them. Some failures should not render them obsolete. Rather, this should signal the complexity involved. From what we’ve learnt from economics over the past two decades – institutions matter and complexity matters. The commons encompass the two.

I am not suggesting the commons are economy-wide phenomena. Nor are they infallible (actually, they’re highly subject to failure). All I’m suggesting is that the next time you think about the commons, do not think of property first. Think of institutional governance – that is the challenge.

Ostrom suggested that institutional diversity may be as important as biological diversity. The commons are important to our institutional diversity, and should not be lost over an obsession with property rights. Property rights are the easy answer (because we understand them). This does not make an answer correct.

What are the Innovation Commons?

An innovation commons is an institution in which private agents cooperate through collective action, to solve the innovation problem, by developing rules for the sharing and governance of those resources. These innovation commons are where the interplay of technology and local market knowledge provide an effective institution for the production and appropriation of innovation resources. An innovation commons is not about an entire economy, yet rather is temporarily defined around a particular technology. It is hypothesised that these innovation commons are socially defined spaces contingent on a set of underlying civil-society rules. For clarity, a few broad examples of proposed innovation commons are hackerspaces, maker spaces, open source software, open science, and DIY satellite communities[1].

The commons are a form of institutional governance of property, and therefore must rest on a particular resource that is of value. In the same way Ostrom (1990) proposed that the commons may, in certain situations, be an effective solution to the dilemma inherent in natural resource management, we propose the same for innovation resources. This research follows in the path of studies of natural[2], knowledge[3]  and culture[4] commons, yet brings innovation resources to the fore. The focus will then be on the underlying governance rules of these collective action spaces.

While the innovation commons are a subset of knowledge commons, they present a different challenge; being devoted to knowledge advance, creative activity, entrepreneurship and novelty. Innovation commons have a unique goal – production of innovation, rather than avoiding depletion.

It is proposed that the issue of free-riding on the common resource is protected through various institutional rules. Rules of which have evolved through time, collectively, by the users themselves. This focus on rules has come to the fore with the recent rise of New Institutional Economics – an important influence through the research.

It is hypothesised that there are three main reasons why the commons present potential; (1) they are an emergent domain of cooperation, absent from government intervention, and therefore escaping regulatory capture and public choice issues; (2) they appear to be present in a high proportion of the early phases of technological trajectories (Aldrich and Fiol 1994), and may represent incipient firms; and (3) they can be developed deeply, testing on multiple domains and scales, providing a robust environment for innovative activity.

This research also presents three main hypotheses over the recent emergence of innovation commons; (1) agents are engaging in collective-action group selection; (2) there is a dual commons of technology and Hayekian market knowledge, which is particularly hard to price in a market; and (3) agents are undertaking a defensive strategy as a mechanism against blocking coalitions. Each is discussed below. These are discussed in relation to the relevant literature.

 

[1] Further, more abstract innovation commons are hypothesised to include guilds, mothers’ groups and agriculture.

[2] Ostrom (1990)

[3] Hess and Ostrom (2006)

[4] Madison et al (2010)

Hayek, Shackle and the Innovation Commons

Hayek, Prices and Knowledge

Prior to the mid-20th century, economics focused almost solely on the allocation of scarce resources. Unfortunately, this remains a legacy in undergraduate textbooks. Yet, in 1945 Hayek revolutionised our understanding of the economic problem through an eloquent articulation of the price mechanism. Rather than attempting optimisation in the allocation of scare resources, he suggested that the problem we are really solving is in the coordination of local knowledge. And, the price mechanism is marvellously efficient at coordinating this knowledge.

Hayek segregates knowledge into two forms, each of which possess distinct characteristics; (1) scientific knowledge, and (2) local knowledge. These characteristics were previously unrecognised, and have significant implications in understanding what the discipline of economics is, and the role of the state in the economic order.

The first is ‘scientific’ knowledge. While undoubtedly important, this type of knowledge drew great attention and traction throughout the socialist calculation debate. Flowing from a focus on this ‘scientific’ knowledge, it was hoped that all information could be quantitatively determined – including prices. Fortunately, this ambitious venture did not gain traction, nor bore fruit. Hayek explained why.

The second category is broadly described as ‘local’ knowledge, and I cannot improve on this oft-quoted description:  “… knowledge of the particular circumstances of time and place” (Hayek 1945, p 522). This knowledge sits hidden in the minds of individuals. It remains tacit until the individual requires it to make decisions over their individual plans. And, even once revealed, we only observe the outcomes, not the reasons behind the decision. It is this detail that is important. Aggregating heterogeneous tacit knowledge naturally renders the knowledge homogenous, and therefore its value disappears. Local knowledge does not, and cannot, sit in concentrated form. The immense value of this distributed knowledge causes significant problems for economists, particularly those partial to central-planning. The problem we face does not rest purely in scientific knowledge, yet rather in “…the utilization of knowledge not given to anyone in its totality” (p 520). Therefore, we continually face the problem of local knowledge coordination.

For the more pure scientific disciplines (Eg. Physics, Chemistry), it is natural to assume that something that cannot be quantitatively measured is of little value. Yet, a social science such as economics is just that; social. Complex interactions by individuals form the context in which all decisions are made. Without the ability to aggregate this information into statistical reports, many ignored this body of knowledge.

Hayek suggested otherwise – examining the institution of the market mechanism, and more specifically, prices. This system, never designed by any one man, allows the coordination of dispersed local knowledge, without the need of specific information of every other individual. If the market had been of deliberate human design, it would have been “… acclaimed as one of the greatest triumphs of the human mind” (Hayek 1945, p 527).

Crudely summarised, Hayek’s genius is that: the price mechanism (and the emerging prices) are an extremely efficient institution for (almost) instantly coordinating the dispersed local knowledge of the time and of the place. The individual actors do not need to know why prices change, they only need to know that they do. They can then revaluate their own individual plans, in relation to all of the other goods and services of which they are interested. Marvellous, indeed.

Free-market economists continually point to this insight; promoting ways in which this price mechanism may more efficiently allow the continuous updating of individual plans, not known to anyone in its totality. Government intervention that distorts prices, therefore, only distorts the individual plans.

Innovation and Uncertainty

When understanding innovation, the literature pushes towards characterising the individual as boundedly rational; using various adapted heuristics to innovate (See Simon 1955). With boundedly rational individuals, innovation can be framed as a knowledge coordination problem, yet of a different nature to those discussed above. While this knowledge is also local and disperse in a Hayekian sense, it cannot be coordinated through prices.  Why? Prices simply do not exist in the early stage of innovation.

Knight (1922) described the inherent differences between risk and uncertainty – where risk is quantifiable and measureable, and where uncertainty cannot be measured. Innovation occurs at the end of the decision spectrum where Knightian uncertainty is greatest. Innovation has long been characterised as making decisions under novelty, a trial-and-error process into the unknown. This is the process of coordinating Shackle’s ‘unknowledge’ of the various innovators, for the production of new knowledge.

Returning to Hayek, he explored the efficiency of the price mechanism as an institution for coordinating local knowledge. How do we go about coordinating ‘unknowledge’? What would be an efficient institution in a theoretical sense? Well, first of all, the process is inherently different. Rather than coordinating local knowledge through prices, we wish to produce new knowledge by coordinating ‘unknowledge’.

It is here where our hypothesis sits. We propose that the ‘innovation commons’ is an institution that efficiently mixes and coordinates this ‘unknowledge’. That is (crudely summarised), the innovation commons are an emergent institution where individuals mix their individual knowledge in the pool; an efficient environment for innovation where sharing is both professed and relied upon.

Milestone Review: Broad Research Context

This is a section out of a milestone review paper I am piecing together. Any questions or feedback are both welcomed and appreciated. 

The broad context of this work is innovation economics, with influences stemming from institutional, evolutionary and complexity economics. These compatible and emerging fields are explored in the modern context of Australian innovation policy; creating a refreshing perspective in a highly controversial arena. The outcomes of the work have significant implications for the Australian Innovation System, and the perspective through which we view innovation policy generally.

The three most influential scholars are J. Schumpeter, E. Ostrom, and F. Hayek. Schumpeter (1942) placed innovation and entrepreneurial activities into the centre of determinants of economic change. Most important was his incorporation of an evolutionary focus, through the now famous ‘gale of creative destruction’. Schumpeter’s legacy is continued throughout this dissertation, with innovation as a continual process of trial-and-error that drives economic change.

In The Use of Knowledge in Society, Hayek (1945) stressed the importance of local knowledge when making economic decisions – re-framing the economic problem as one of knowledge coordination, while simultaneously generating concern over central planning interventions. While Hayek marvelled at the efficiency of the institution of the market in coordinating local knowledge, we switch focus to commons institutions. Innovation is a problem in coordination of innovation resources (including knowledge), facing similar institutional planning challenges.

Ostrom (1990), through study of natural resource governance, demonstrated how the commons did not always result in tragedy, if a complex, bottom-up institutional setting for collective action evolves. This revealed how the commons could be, and are being, utilised as a voluntary, self-organising institution for governance of social dilemmas.

We hypothesise that innovation commons are emerging through a complex collection of rules and governance by citizens – to avoid the social dilemmas inherent in innovation. That is, innovation is occurring through an evolutionary process (Schumpeterian), that can be analysed through institutions where the governance rules for collective action are developed from the bottom-up (Ostrom), because these institutions appear to be very efficient at coordinating and mixing knowledge in the commons (Hayek).

Three Overly-Simplistic Models of the Commons

Below is a short discussion of three influential models on the commons; (1) The Tragedy of the Commons; (2) The Prisoners Dilemma Game; and (3) The Logic of Collective Action. Following this, I discuss why these overly-simplistic models have little traction in reality, and how unfortunately public policy was, and remains, strongly influenced by their legacy. Public policy should have no place for simplistic analogies. The literature is moving on, public policy isn’t.

The Tragedy of the Commons

Unfortunately, Hardin (1968) has become the initial model of thought for economists considering common property. Combining an ‘open to all’ pasture with self-interested herders, the model predicts unavoidable depletion[1]. This eloquent passage describes the majority opinion for many decades:

“Ruin is the destination to which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons” (Hardin 1968, p 1244)

Twelve years earlier, similar concerns were also expressed:

“Wealth that is free for all is valued by no one because he who is foolhardy enough to wait for its proper time of use will only find that it has been taken by another” (Gordon 1954, p124)

The Prisoners’ Dilemma Game

The Prisoner’s Dilemma Game[1] has been an important model for formalising Hardin’s Tragedy into game theoretic terms. The easy tractability of the PD game has led it to become the most famous social dilemma. In the most elementary model, the players in the game were assumed to be non-cooperative, possess complete information, and not repeat games[2]. These simplistic assumptions result in a third-best, pareto-inferior outcome[3]. This model has remained an important step on the path to examining the concepts of rationality, group welfare and the market. This problem has fascinated scholars, leading to a huge number of published articles on the topic. Many of these paper enforce differing assumptions, with vastly more positive outcomes. Unfortunately, most only read the most elementary model.

The Logic of Collective Action

Olson (1968) explored the relationship between individual and group preferences, introducing the challenges of human organisation through the ‘free-rider’ problem. Olson explores the link between self-interested individuals and their quest to pursue joint welfare. Although the work as a whole is considered pessimistic, it provides optimism through introducing the impact of size, and the level to which defecting is visible, on group ability to pursue common outcomes. The relationship between individual and group preferences is best described below:

“Though all of the members of the group … have a common interest in obtaining this collective benefit, they have no common interest in paying the cost of providing that collective good. Each would prefer that the others pay the entire cost, and ordinarily would get any benefit provided whether he has borne part of the cost or not.” Olson (1968, p21)

Public Policy

The three models above are simplistic conceptualisations of an extremely complex problem. Yet, they have remained influential on public policy. Only viewing these widely cited models, the commons are the unfavoured third institutional solution.

The ‘default’ move for policy makers when encountering common property is to develop private or public solutions to avoid this tragedy. These are achieved by changing the underlying institutions; including the implementation of private property rights to separate out the group interests, or by using coercion to centralise rights into various authoritative organisations.

The simplicity of the three models presented above provides a fantastic concept for the classroom. Yet, they are no basis for public policy. The assumptions remain inadequate in a complex and interconnected world.

As a whole, these models form an extremely sparse view of the commons (Ostrom, 2007).  Hess and Ostrom (2006, p11) describe four particular aspects that do not transfer to reality:

“… (1) [Hardin] was actually discussing open access rather than managed commons; (2) he assumed little or no communication; (3) he postulated that people act only in their immediate self-interest… ; (4) he offered only two solutions to correct the tragedy – privatization or government intervention.” 


[1] The game was developed in the early 1950s by A. W. Tucker, see Cunningham 1967)

[2] See Dawes (1973, 1975)

[3] Each player with defect on cooperation using their dominant strategy, resulting in a collectively non-rational outcome from individually rational strategies.


[1] Aristotle and Hobbes were among earlier scholars to observe this tragedy, yet it was Hardin’s parable that gained traction.

Confirmation Research Abstract/Brief Summary

I’m finally putting together a research proposal for my Confirmation of Candidature. I thought I would share. Please note, this is a preliminary draft.

Innovation is widely considered to be produced in suboptimal quantity; subsequently being characterised as a market failure. Government responses have led to externally imposed solutions dichotomously sitting between privatisation and public funding. Innovation is a coordination problem through uncertain trial-and-error; a problem where private and public solutions have widespread costs. We hypothesise that innovation resources may be pooled under common property where the institutional structure and governance rules allow efficient mixing of market information and technology in the pool; the ‘innovation commons’.

Are the commons are once again being accepted uncritically as a remorseless tragedy? Public policy presumptions over individuals forming efficient collective-action institutions have been misguided in the past, we ask whether they are once again. To do so, we aim to address why these innovation commons are emerging, the governance rules on which they are based, and how findings may be incorporated into Australian innovation policy. To seek this new perspective within innovation economics we must draw from numerous fields. These include: institutional economics, collective action governance, evolutionary economics, complexity economics and Hayekian knowledge coordination.

The potential of commons as an institutional solution to innovation has not been addressed generally or formally in the literature. This forms a significant place for addition both to the academic literature and practical policy application. The shaping of the Australian innovation system faces significant challenges in incentivising innovation into the future; forming our motivation.

The work is based on both an empirical and theoretical nature. While the majority of the analysis will utilise Elinor Ostrom’s Institutional Analysis and Development (IAD) framework to analyse case studies, this needs a theoretical influence.  The IAD framework provides guidance in applying case studies to situations where a complex mixture of rules, actions and outcomes may appear overwhelming. The IAD will be applied in a meta-analysis over two main case studies: hackerspaces and open science. Using the findings from these case studies, the thesis will provide a theoretical contribution to the literature in a modified IAD. This will take into account the additional complications when mixing innovation resources throughout the innovation process. This will concisely add to the body of existing literature surrounding commons, institutions and innovation.

Adam Smith on Cooperation

There is a tendency in economics to focus on one particular aspect of Smith’s broad legacy. This stems from the following widely quoted passage:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Smith (1776, Chapter 2) – The Wealth of Nations

This is the foundation of much of the economic work over the 19th and 20th century; self-interested individuals achieving their own ends.

A little quoted passage, from earlier in the same paragraph, greatly changes the context:

In a civilised society he (man) stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.

- Smith (1776, Chapter 2) – The Wealth of Nations

Here, Smith is exploring the idea of widespread cooperation. The market mechanism is one institution through which we can achieve this cooperation, yet there are also many others. Smith proposed that the market mechanism is efficient for coordinating the trading between strangers – where personal cooperation is not feasible. Coase (1976) further explores this:

… Adam Smith’s argument for the use of the market for the organisation of economic activity is much stronger than it is usually thought to be. The market is not simply an ingenious mechanism, fueled by self-interest, for securing the co-operation of individuals in the production of goods and services. In most circumstances it is the only way in which this could be done. Nor does government regulation or operation represent a satisfactory way out …

The great advantage of the market is that it is able to use the strength of self-interest to offset the weakness and partiality of benevolence, so that those who are unknown, unattractive, or unimportant, will have their wants served.

- Coase  (1976, p 544) – Adam Smith’s View of Man

This implies that the market is an efficient mechanism where significant trust cannot be acquired through individuals. This is important considering the current ways in which we are coordinating in the commons based on trust and reciprocity, where the institutional governance rules are adequate.

‘Promises to Keep: Technology, Law and the Future of Entertainment’ – William Fisher (2004) – Chapter 6 Summary and Review

I’m currently taking part in CopyrightX. Today I present both a review and summary of one of the readings by William Fisher (2004) - ‘Promises to Keep: Technology, Law and the Future of Entertainment’ – Chapter 6: An Alternative Compensation System.

Incentives are misaligned in innovation. This stems from two concepts; (1) ideas are public goods by nature, (2) innovation and creative acts have significant positive spillover effects. Public goods are those which are both nonrivalrous and nonexcludabile in nature. This leads to appropriability problems for potential creators. Combining this with financing concerns, inherent uncertainty and high fixed costs, leads to socially suboptimal levels of both innovation and creativity. This is the innovation problem. Note – While this social dilemma does not solely relate to innovation, this will be the focus of the discussion today.

This innovation problem has been debated for centuries, rendering several government solutions. Fisher (2004) focuses on five of these; (1) government supply of the goods themselves, (2) government paying private actors to supply the goods, (3) concept of post-hoc prizes or rewards, (4) granting of exclusive rights to reduce appropriability concerns, (5) assisting private parties to appropriate through increasing the excludability of the goods (either directly or indirectly, such as trade-secret law).

These solutions form the innovation system. They are all government-imposed institutional solutions to the innovation problem, and can loosely be placed into either private (such as intellectual property) or public (such as Research and Development subsidy). It is important to note from the outset that the focus of the innovation system is on increasing incentives for creativity while not reducing the substantial benefits of open or cumulative innovation.

Today, we will focus on variants of the fourth strategy, which incorporates copyright law. This institutional solution represents significant debate in the literature. And, based on this, Fisher (2004) suggests a “fundamental change in approach.”
More specifically he “… proposes that we replace major portions of the copyright and encryption-reinforcement models with a variant of the third strategy – a governmentally administered reward system.”

The system, in a crudely brief outline, runs like this. Instead of providing exclusive rights of individuals to sell their work, authors would register new works with the Copyright Office. From here, the digital distributions of the files would be tracked (various means are suggested). Government taxation (again, various means) would provide funds. Compensation would be distributed based on numerous criteria (you guessed it… lots of criteria). Theoretically, the result would be lower costs for consumers (always good), more reliable compensation for artists (providing incentive to create) and the pathway for cumulative innovation and derivate use of works (the major disadvantage of providing exclusive rights). On the other hand, this system would be an extremely complicated one, with distorted behavior and inability of artists to control their products in the public domain. And, from a libertarian economists’ view – is inherent with regulatory capture/rent-seeking, public choice pitfalls and other forms of government failure (unavoidable when moving away from a market system).

While my latter comments may suggest this system is fraught with danger – it should be taken more as a form of constructive criticism. The copyright system is in need, undeniably, of revision, and few innovative solutions such as this come along. This, I hope, is a broader movement away from thinking of the ‘optimal level of copyright protection’ towards a re-vamp of the system as a whole.

The remainder of the Chapter is focused on the more specific details of the Alternative Compensation System. I will only briefly explore the sections – you should do so yourself, here.

Registration – One of the essential elements of the system is a way in which to track the digital copies of songs and movies. Fisher suggests some type of “unique and durable digital fingerprint”. Similarly, a centralized registration system is suggested – possibly the current Copyright office. This would involve submission over the internet, with a small registration fees, and the registration of details such as the percentage of material from other registered recordings.

Taxation – Money is raised through one of two means; (1) increases in federal income tax, (2) taxation of the goods and services used in gaining access to music and film. These both have benefits and costs, yet analysis suggests the first would be the better of the two approaches. The former (income tax) has two main benefits. First, it is efficient (only on the basis it does not require significant additional administrative costs). Second, distortions are claimed to be less as the deadweight losses are moderate in scale. On the negative side, tax increases are inherently politically unpopular.  The second solution focuses on taxing goods and services such as “… (1) equipment used to make copies of digital recordings; (2) media used to store such copies; (3) services used to gain access to the Internet, either to download files or to stream recordings; and (4) peer-to-peer systems or other services used to share files.” One of the most prominent potential tax targets is internet access services themselves, as well as the online services that assist in locating or sharing creative content. Advantages and disadvantages of these methods are both complex and widespread. Fisher suggests that this is likely to be more politically popular, and would be perceived as more voluntary. Negatively, the approach is cumbersome and riddled with adminisstrative costs.

Measuring Value – When distributing money, the obvious solution rests on the basis of objective. Fisher suggests that “… our objective would be to make each artist’s share of the pot proportional to the total value that, during a given year, consumers derived from his or her creations.” We need to continually adhere to this for three reasons; (1) proivision of appropriate signals to authors, (2) fairness, and (3) to avoid the pitfalls of government failure in judging the benegfits to society. In the current system, we determine value through the price system. The most basic technique in the new system would be to rely on the frequency of downloads. Theoretically, it is much easier to determine the number of downloads compared to the number of times a piece is enjoyed by any given individual. Another issue is that if we were to count the number of downloads, it would “…make it discouragingly easy to unscrupulous people to “game” the system.” Fisher suggests the most promising alternative it to enact some form of sampling of the population (much like that currently employed in television ratings, yet on a much larger scale). Further, discussion and adjustments for the duration of various works is warranted. Even further, we need to ask whether frequency of consumption has a strong correlation with enjoyment, and hence benefit to society. In response to this, Fisher suggests a voting system.

Derivative Works – The proposed system would make it possible “to divide the stream of revenue attributable to such a derviative or composite recording among the various contributors to it.” The division would be arbitrary and problematic, yet is nonetheless theoretically possible.

Following the discussions above, Fisher goes into length over the merits and demerits of the proposed system. The most exciting, for myself, is this:

The proposed system would help us to reconcile two goals long considered to be in conflict – facilitating cumulative innovation, and ensuring that pioneers are adequately compensated - p36

As I mentioned earlier – current discussions in copyright tend to focus on a continuum of balancing these two objectives, Fisher tries to reconcile them.

Why I find Innovation so Intriguing – Ideas as Recipes

Today I very briefly explain why I find innovation economics so intriguing, through a discussion of the work of Paul Romer throughout the late 1980s and early 1990s. You can find some great information in this EconTalk, as well as this EconTalk and his latest TED talk regarding Charter Cities.

Paul Romer (1990) – Endogenous Technological Change – refocused our economic lens. Previously, Neoclassical economics regarded capital accumulation and savings as the primary determinants of economic growth. That is, through an optimal savings rate, we would accumulate more and more capital (physical capital), and this would increase economic growth.

There were a number of issues with this, yet I wish to focus on one: steady-state of growth. This was true for two reasons. Firstly, because of the various assumptions regarding savings and capital accumulation, economies eventually reached a steady state – that is, all countries would reach their full potential of growth, and stop growing. Secondly, we would see all economies converge over time.

The data disagrees, and so did Romer.

Romer said something else was important – ideas and knowledge. Throughout his work, he uses the metaphor of recipes.

In our world, we have a certain number of scarce resources. Economic growth occurs when we take these resources and make them into something more valuable. The resources are the ingredients, and the ideas and the recipes.

From his 1993 paper:

“The most important lesson from the study of Research and Development, economic growth, and the history of technology is that there are more ways to arrange the objects of the physical world than humans can possibly imagine.”

Further, from this article:

“To get some sense of how much scope there is for more such discoveries, we can calculate as follows. The periodic table contains about a hundred different types of atoms, which means that the number of combinations made up of four different elements is about 100 × 99 × 98 × 97 = 94,000,000. A list of numbers like 6, 2, 1, 7 can represent the proportions for using the four elements in a recipe. To keep things simple, assume that the numbers in the list must lie between 1 and 10, that no fractions are allowed, and that the smallest number must always be 1. Then there are about 3,500 different sets of proportions for each choice of four elements, and 3,500 × 94,000,000 (or 330,000,000,000) different recipes in total. If laboratories around the world evaluated one thousand recipes each day, it would take nearly a million years to go through them all. “

This is why I’m an innovation economist. I believe, following Romer, that our focus should be on innovation, new ideas, knowledge accumulation and human capital.