Broken Symmetry

F. Scott Kieff on New Institutional Economics in Patent and Antitrust

Truth on the Market has been posting guest comments on a new treatise on IP & Antitrust from Prof. Michael Carrier this week. As usual, Prof. Kieff brings order to the confusion of proposals for reform of IP and antitrust law:

Indeed, while much is made about the uncertainty of patents – it’s all the rage today – one of the central problems with many of the legal changes that Michael proposes is that these changes inject into the patent system a much greater uncertainty, and an uncertainty of a much more pernicious type. Business can deal well with factual uncertainty – in fact many forms of business thrive on it (think options, futures, insurance, etc) – but the one type of uncertainty that is particularly bad for business overall is the uncertainty caused by having the underlying legal rules of the game enforced as a function of fashion and politics. But this is what you get when the enforcement mechanism (the details of the particular framework of the legal institutional design) are matters of flexible discretion.

For an earlier post on law as a game see here. Regardless of whether you agree with Prof. Kieff's conclusions about what that theory implies, I find no way to disagree with his suggestion that New Institutional Economics provides the best theory for analyzing the effect of changes in the rules of the IP and antitrust game.

Are Tweets Copyrightable?

Mark Cuban asks with an evil grin:

Here is a question for all you legal scholars out there. Is a tweet copyrightable ? Is a tweet copyrighted by default when its published ? Can there possibly be a fair use exception for something that is only 140 characters or less ?

Under federal law, copyrights vest automatically in their author when a work is first fixed in tangible medium. There is some debate as to whether they may exist even earlier -- e.g., while the tweet is still in its author's head, or after it's been spoken but before it's been entered into text -- under state copyright laws. That debate hasn't been tested in court because it's hardly worth suing over. But it's not entirely clear that federal copyright law preempts state copyright law.

So if the subject matter of a tweet is eligible for copyright, then copyright vests upon tweeting. Is it eligible subject matter?

That depends. The Supreme Court dealt with the issue of eligible subject matter in Feist. The rule under Feist is that subject matter, to be eligible, must display a minimal amount of "originality." Originality here means that the author had to make some creative choice about how to select, arrange, or produce the subject matter. For example, the phone numbers in the white pages of a phone book are not copyrightable. But the yellow pages that provide a particular selection and arrangement of phone numbers are. This example is going out of date fast.

A better example might be of tweets during a basketball game. A tweet that reports only the score of the game would not be eligible subject matter under Feist. A tweet that reports the score and exclaims "Mavs Rule!" might be. In general, the more the tweet reflects a selection or arrangement of facts rather than a rote report, the more likely the subject matter is eligible.

Fair use and other defenses (such as scenes a faire) are still available, but irrelevant to the question of whether copyright may vest. Moreover, it would be hard to argue that any reproduction of an entire tweet was a fair use because any supposed fair use is measured against the size of the original. More than a few characters and you're already close to 140! Perhaps the argument would be that it's not individual tweets, but the entire stream that should be the basis for proportionality. That's interesting, but the case law on fair use of spoken word recordings might effectively defeat that argument. Scenes a faire is more promising as a defense to infringement of a copyright in "Mavs Rule!," for example. But only when the reproduction was made in a similar context, right?

I'm sympathetic to the people who complain about whether Mark is really serious about this question. As Robert Frost wrote, "Something there is that doesn't love a wall." But at least before DMCA and the Supreme Court's decision to ignore the plan meaning of the Constitution in Eldred, copyright law did a pretty good job making good neighbors out of authors and artists who are continually borrowing and rehashing each others' work.

Too bad Bill Patry's not still around to weigh in on this one.

Spring 2009 Ocean Tomo Auction: The Secondary Market Evolves

Although many of the attendees to the auction may have come away with the sense that the auction market is closed until the recession ends, a look at the numbers says otherwise. In particular, the total volume of sales at the auction was around $3 million -- considerably less than the immediately preceding auctions, but on par with the the first auctions held by Ocean Tomo about four years ago. For the auction market at least, it has been a lost half-decade rather than a lost decade as it has been for the equity markets.

I have some first-hand experience here. This was my second auction. The first I attended was in Chicago in October 2007. The impression I had there was the same that many who first attended yesterday probably came away with -- i.e., that this is a very thin market, with few bidders, and very specialized property for sale. For an investor, thin markets are a good thing, presenting the opportunity for arbitrage given the right connections and funding. From that perspective at least, things are looking better now than they did a few years ago. It was clear, for example, that some bidders who had been involved in 2007 were no longer around for this auction. There is no reason to believe, however, that there is less valuable IP available for sale.

On the other hand, it was obvious to me as somebody representing a seller that most sellers were ill-advised at this auction. Thanks to some careful pre-auction work, we (at Drinker Biddle & Reath) were able to close the sale for our client's lot. (Sorry, but due to client confidentiality rules I cannot say more.) Unfortunately, this was not the result for many of the sellers at the auction yesterday. In some of these cases, I could pick out from the description in the catalog some obvious problems that might have prevented bids from coming in. In others, it was clear to me as somebody who has worked at a VC fund that there was no market whatsoever (at least for now) for the technology claimed by the portfolio. In all of these cases, the sellers probably could have been better advised on how to value their IP and present it for sale at the auction.

Noteworthy also was the level of excellence demonstrated by Ocean Tomo in putting together these events. At both of the auctions I have attended, Ocean Tomo has assembled a first-class group of panelists to provide information and training for the inventors, business people, lawyers, and investors who attend. I might add too that they know how to pick their venues. No rubber chicken for lunch at these events. Ocean Tomo and its sponsors are providing a valuable public service to the market at the same time they are doing good business at these events.

Despite these successes, it is becoming clear by now that because of the transactions costs associated with the valuation and exchange of IP, auctions are usually the best option only for smaller, more isolated portfolios. Once the strategic value of a portfolio exceeds a certain threshold, IP owners will find it more worthwhile to hire lawyers or private brokers to package and market a portfolio to potential buyers.

Some people might think this spells doom for Ocean Tomo. Those people are sorely mistaken for the simple reason that the packaging and marketing of IP requires highly specialized training, along with access to a specialized network of professional buyers and sellers. Regardless of whether Ocean Tomo continues its auctions with the same frequency with which they have been held over the past few years, there is no doubt that it has accumulated an amazing group of professionals and perhaps the best social network of accountants, lawyers, brokers, buyers, and sellers that is available to non-repeat players in this market. This is only a guess, but an educated one: the IP market is evolving and Ocean Tomo is about to evolve with it.

F.A. Hayek on The Use of Knowledge in Society

Worth revisiting from time to time: (italics are mine)

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources--if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality....

In ordinary language we describe by the word "planning" the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy-or of designing an efficient economic system....

The answer to this question is closely connected with that other question which arises here, that of who is to do the ;planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning--direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopolies.

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. This, in turn, depends on whether we are more likely to succeeding putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to dovetail their plans with those of others....

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active co-operation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. The shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices-- are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others....

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for--as the statisticians occasionally seem to be inclined to do--by the "law of large numbers" or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs: tiles for its roof, stationery or its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market....

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the "man on the spot" cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system....

It is in this connection that what I have called the "economic calculus" (or the Pure Logic of (Choice) helps us, at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system. Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not-- every time some small adjustment in the allocation of resources had to be made--go explicitly through all the relations between ends and means which might possibly be affected. It is indeed the great contribution of the Pure Logic of Choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of equivalence (or "values," or "marginal rates of substitution"), that is, by attaching to each kind of scarce resource a numerical index which cannot be derived from any property possessed by that particular thing, but which reflects, or in which is condensed, its significance in view of the whole means-end structure. In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle ab initio or without needing at any stage to survey it at once in all its ramifications.

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose--and it is significant that it does not matter--which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity--or rather that local prices are connected in a manner determined by the cost of transport, etc.--brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

We must look at the price system as such a mechanism for communicating information if we want to understand its real function-- a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement....

I have deliberately used the word"marvel" to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for "conscious direction"--and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously--should remember this: The problem is precisely how to extend the span of out utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.

The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science. As Alfred Whitehead has said in another connection, "It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them." This is of profound significance in the social field. We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.

The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a co-ordinated utilization of resources based on an equally divided knowledge has become possible. The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization. It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type. All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it -- such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill....

A recent [Can you believe how long ago this was? -MFM] statement by Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist "from the elementary proposition that consumers in evaluating ('demanding') consumers' goods ipso facto also evaluate the means of production which enter into the production of these goods." [1] Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter's "ipso facto" presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers' goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers' goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.

That an economist of Professor Schumpeter's standing should thus have fallen into a trap which the ambiguity of the term "datum" sets to the unwary can hardly be explained as a simple error. It suggests rather that there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem.

These days, Schumpeter is praised for seeing beyond neoclassical equilibrium theory. To my mind at least, this settles the question of who between Schumpeter and Hayek, was the more farsighted economist.

What would Hayek have to say about technology like Twitter and Google Moderator? Even Google search itself? We are in uncharted waters folks.

Douglass North on What We Don't Understand

"Economics, political science, sociology ... are static disciplines... [that] assume[] away all of the interesting things we want to understand... What's missing? Belief. Time. Culture."

Broken Symmetry readers should take note that "non-ergodicity" is a characteristic of dynamical systems with spontaneously broken symmetries.

You can download a powerpoint presentation in which North makes similar points here.

And here is an academic paper on the same subject.

For more on these topics, see an earlier post on The Three Laws of Performance here.

Would it be fair to call an "open access" state a manifestation of Csikszentmihalyi's flow at the level of organizations and organizations of organizations?

Now Business Leaders Really Have No Excuse

The President himself is taking questions online:

Today, the President invited everyone to use a new feature on WhiteHouse.gov called "Open for Questions" to ask a question about the economy and rate other questions up or down. Then, on Thursday morning, the President will conduct a special online town hall on the economy and answer some of the most popular questions and the event will be streamed on WhiteHouse.gov.

Google's Moderator system is being used.

Bonus Question for Constitutional Lawyers: should the algorithms used here to decide how to moderate be available for public scrutiny?

For earlier posts on closing the feedback loop between top leaders and followers through the Internet see here and here.

Ask and Ye Shall Receive

In a post titled Revitalizing a Culture of Innovation in the United States, I suggested that improved access to the gatekeepers of decisions on technological development would be useful.

Here we have a good start:

ExecTweets, the latest third-party site to use Twitter’s immense about of data to attempt to turn it into something useful for a narrower audience. The audience in this case is business users, as ExecTweets is all about pulling in tweets from various industry’s top executives who use Twitter.

Ocean Tomo Spring 2009 Live Auction in San Francisco

I will be in attendance on Thursday and Friday. Shoot me an email if you're interested in meeting up.

Quote from Creativity by Csikszentmihalyi: Hayek and Evolutionary Culture

Chapter 13 of this extraordinary book is titled, "The Making of Culture." In it, C. presents prescriptions for how to foster a more creative culture. Within the systems theory of creativity that he promotes in this and others of his books, part of the cycle of creativity involves evaluating new work for its worthiness as an addition to an existing domain of symbolic knowledge.

One of the useful observations C. makes in this context is that the impact of a new discovery may extend beyond the domain in which it is made. An obvious example is the discovery of a self-sustained nuclear chain reaction by Enrico Fermi. A less obvious example, perhaps, is the emergence of cosmetic dentistry after the fluoridation of the water supply. As C. puts it: "Left with carte blanche, every field naturally wants to control as many of the resources of society as possible, and more."

At bottom, C. refuses a laissez faire attitude to competition among fields because, however sensible a new discovery might appear to the experts in a given domain, there is no guarantee that the same discovery will be well-received in the culture that comprises all domains. For C., new discoveries should be evaluated both by the experts of a domain and by experts on culture as a whole. His specific suggestion is the most benign of the many similar suggestions that have been made along these lines in the past. Specifically, he envisions:

[A] civil service above party politics and disciplinary fashions, composed of those who aspire to be 'good ancestors,' as Jonas Salk called them, and who would be willing to represent the claims of evolution when assessing whether scientific advances should receive social support. Inevitably such a group would be composed mainly of older individuals, and therefore it would be open to criticism from younger colleagues who are more concerned with advancing their own scientific careers. On the other hand, the probability for dispassionate wisdom is greater among those who have had more, and more varied, experience and who can see their expertise in a broader context -- and those in turn are likely to be older persons. Yet our society expects very little from its elders. This might be one important contribution of seniors that will benefit everyone.

A gerontocracy. Well this is certainly less menacing than the cultural revolution envisioned by Mao, at least at first. Mormons should be pleased.

Alas, C. has faltered here. For after having spent hundreds of pages analyzing and explaining his evolutionary theory of culture and psychology, he fails to follow it through to its logical conclusion: If individuals are happiest when in a psychological state most conducive to evolution of self, then why should not society be happiest under a government most conducive to evolution of culture?

The thinker most often associated with this notion of evolutionary culture is F.A. Hayek. Hayek is also well-known for promoting markets as an efficient mechanism for allocating resources within society.

But C. dismisses the suggestion that the invisible hand can serve effectively to arbitrate the demands of competing fields on cultural resources. First, he points out that no markets are in fact, free. In effect, this is a nod to public choice theory, which acknowledges how well-organized or rich minorities can manipulate government into distorting markets. That's true, of course. Yet it's more an indictment of government than of markets. C. does not thereby prove (and I would say he cannot prove) that because markets can be manipulated they should be supplanted with a gerontocracy.

Second, he points out that market decisions tend to be short-sighted in various ways, such as being oriented too much toward the present. In effect, this is a nod to bounded rationality and behavioral economics. As our present predicament demonstrates quite clearly, markets can and do blow up when too few participants are capable of valuing what is exchanged -- a valuation that gets more difficult the larger and longer the scales of exchange. But again this proves merely that markets have problems, not that a gerontocracy should be preferred to markets.

C. nonetheless for these reasons dismisses the market as a sufficient mechanism for arbitrating the competing claims of new discoveries from different domains. Oddly, however, he writes the following immediately thereafter:

The greatest art, East or West, was not produced when the artists set the agenda, but when patrons insisted on certain standards that benefited them. Patrons wanted primarily to be admired by the public, so the art they demanded had to appeal to and impress the entire community. In this sense, medieval and Renaissance art, commissioned by popes and princes, was in reality more democratic than it has become since the art world gained the power to separate itself from the rest of society -- as a field with its own peculiar tastes and criteria of selection.

This is fishy. Having dismissed the market as a mechanism for arbitrating taste, C. now appeals to the wisdom of patrons who sought approval from... the market of public opinion. If C. is correct in his assertion, then it might follow that the greatest art resulted when patrons were best able to constrain artists to produce what the market demanded. Yet this is exactly the benefit of markets that people like Milton Friedman and F.A. Hayek have cited in their support! Almost no advocate of free markets (and certainly neither Friedman nor Hayek) has promoted an unmediated free-for-all of exchange. There is always a legitimate role for government to serve -- like good patrons or popes -- in constituting and mediating transactions. The point is that spontaneous ordering is the best way to match the standards placed upon artists to the constantly evolving tastes of society. As Hayek explained, this is because of the "knowledge problem" faced by any individuals who might otherwise seek to match the supply of new discoveries to the demand of cultural desires. A gerontocracy is no match for spontaneous ordering -- an ordering that might even be conceived as cultural flow.

This is not to say, of course, that there is no room for improvement in how markets are regulated. Public choice theory and behavioral economics should be incorporated into regulatory systems design -- along with any and all new discoveries that can improve the stability and growth of our system. But we should not discard our system, the best the world has ever seen, in favor of rule by faculty committee. That experiment was tried one too many times in the 20th Century, and with nasty results.

Phase Invariance and Scheduling

I've been doing quite a few teleconferences with folks in the Far East lately, but have yet to develop that ability to think in terms of their time when scheduling things. In fact, I'm in that rather awkward in-between point in the learning curve in which my mind is aware of the issue, but often reacts in unpredictable ways -- for example, by scheduling one day ahead on our time rather than on theirs.

A few weeks ago I was reading a book about Venetian opera during the middle ages. It's not as random as it sounds -- the book, titled Song and season : science, culture, and theatrical time in early modern Venice, takes its time in first explaining the mechanisms for tracking time on a daily, weekly, and monthly basis before diving into its thesis about how this affected Opera. (Sorry to the author, I didn't read that part!)

Venice had and has a beautiful clock tower, the orologio, which synchronized the activities of Venice's inhabitants on a daily basis. Venetians in that period did not have the option of owning their own watch and keeping their own time -- watches hadn't been invented yet!

The geography of Venice, circumscribed as it is by the lagoon, meant that nearly everybody living there could hear the orologio when it tolled. Interestingly, in Venice the length of the hours changed with the seasons -- summer hours were longer than winter hours. In the Middle East, the day was divided into twenty-four equal length periods that began at sunset. In Venice, the night was divided into twelve equal length periods and the day twelve equal length periods. Thus, the hours were longer in Venice than in Jerusalem during this period.

Humans are diurnal animals. I wonder if the reason why timekeeping methods varied is because Venice was further from the equator than most Middle Eastern countries? A natural test of this hypothesis could be made by studying the timekeeping practices of far northern cultures in Finland or Iceland. I will have to do this at some point.

But the connection to scheduling teleconferences with the Far East is this: just as Venice's clock tower permitted for the first time for the activities of people in a decentralized area -- a city -- to be synchronized, the invention of modern computers and telecommunications have permitted for the first time for the activities of people around the world to be synchronized. I believe that this fact, as much as any Ricardian theory of comparative advantage or other economic theory of gains from trade, is part of the explanation for the explosion of growth with globalization.

Part of what makes this observation interesting is that it has instrumental value -- i.e., it suggests prescriptions for promoting growth that aren't as easily seen from the existing economic models.

For example, if we want to promote efficiency, perhaps we should think about making time more flexible to accommodate the biological needs of an organization of diurnal people. Maybe working longer hours in the summer and shorter hours in the winter is a better way to keep people working productively over many years.

As another example, perhaps it would be useful to have a tool that helped us to visualize how people were experiencing time differently from us around the world. I'm thinking of a globe with pushpins for everybody on our team and a sun and moon casting their shadows onto the globe so that we can actually -- see -- how time is evolving the same way for all of us.

It might bring us closer.

IP Valuation

I'm very disappointed to have missed out on the discussion in the comments to this post at the IAM blog, but glad at least to have found the comments now through a comment over at the interesting new IP Prospective blog. Some of the following remarks were made also by commenters there (go read the whole blog post and comments). IP valuations are often done very differently depending on whether the IP is considered a proprietary asset or whether it is intended to be licensed out or sold. As a rough cut, I'd say that in the former case, IP is viewed as equity and in the latter, as an asset.

So long as we're talking about the same thing the two valuations should end up agreeing. The fact that they don't often agree goes more to how we're not talking about the same thing than it does to differences in methods of valuation. In both cases, valuations should ultimately rely upon some discounted cash flow analysis.

What are we talking about when we talk about IP? There is no single right answer because there is no single purpose for IP. Yet the right answers narrow down considerably if one focuses on definitions that incorporate characteristics of every category of IP recognized by law (trade secrets, copyright, trademark, and patents). Here's one cut at such a definition: IP is any good or service protected by exclusive rights that gives a company a competitive advantage. If the company would not have the competitive advantage without the exclusive rights, then valuations should focus on the legal strength of the IP in valuing it. If the company would have its competitive advantage from the IP regardless of whether the legal rights were enforceable, then valuations should focus on the economic advantages in terms of reduced costs or increased price inelasticity without paying too much attention to the legal issues.

One thing that's worth nothing, however, is that if the market for IP rights were more transactional rather than litigation-driven, these two approaches to valuation would collapse into one. Transactional norms -- because transactions are voluntary -- tend to mimic the needs of the parties to a transaction.

Lemley and Myhrvold have an interesting suggestion for promoting transactional norms, which is echoed by a number of earlier commenters: make full disclosure of the terms of licensing or assignment of patent rights part of the quid pro quo for patenting. Comparables aren't great in real estate either, but the real estate market clears with enough bad comparable information available to both parties.

ADDENDUM: I may be shortchanging the importance of valuation methodology a little here. Last year I did a whole post on how valuation methodologies could be improved. See here. That post was making a big stretch, however, since frequency-averaged measurements of costs or price inelasticity are not part of accountants' or even economists' toolkit right now. There are glimmers of hope that they may come to be adopted. See this post and the linked article on how relationships between firms is discernible from the synchronization of market prices.

At the core of any competitive advantage is some capability (Teece) or routine (Nelson and Winter) of a firm to cooperatively produce for a market. Looking at time-correlations (i.e., equivalently, frequency synchronization) is a good way to see how an innovation improves competitive advantage. If I were an academic, I'd be writing a book on this now.

Etymology of the Day: Culture

Adopted from French culture (in Old French couture), adaptation of Latin cultura cultivation, tending, in Christian authors, worship, formed on participial adjective of colere: see CULT.

Synchronized Clusters in Public Markets

From a recently posted article by Yik Wen Goo, Tong Wei Lian, Wei Guang Ong, Wen Ting Choi, and Siew-Ann Cheong:

We call these small clusters of very strongly correlated stocks financial atoms. The correlation levels within financial atoms rise significantly above the background level c0, because the dynamics of atomic stocks are coherent over time scales much longer than the average trading interval, which plays the role of the ‘nuclear/electronic’ time scale. The existence of such financial atoms is evident from earlier studies [citations omitted], where they are referred to as synchronized clusters. However, the separation of ‘nuclear/electronic’ and atomic time scales was not recognized. The potential of using financial atoms as effective variables to describe real financial markets is also not widely appreciated.

Understanding the characteristic time-scale of various dynamical processes is foundational to any effective field theory, even in economics. Read the paper for all of the relevant caveats to use of this kind of modelling, then marvel at how easy visualizing correlation of risk is in view of these kinds of diagrams:

Their agenda is quite ambitious:

Our analyses and findings have even more serious implications to understanding and coping with financial crises. As suggested by previous works [citations omitted], and also judging by the intriguing results seen in the NYSE, HKSE, and SGX, we believe a market becomes extremely susceptible to crashes when a significant fraction of stocks gets lock into a single financial supermolecule. If we can determine the critical size of such a market-spanning supermolecule, and also continuously track the sizes of growing supermolecules, we might be able to either forecast the onset of a financial crisis one or two months in advance, or perhaps even avert the crisis entirely.

More likely, the structure of the market will evolve and become harder to track if this type of analysis is widely adopted. But this is more evidence of periodicity than I expected to see in phenomena as complex as market prices.

Last July I wrote the following in a post, figuring that even optimistically I wouldn't see anything like this paper for a long time:

Frequency-averaged pictures of consumption and production are more useful in measuring and forecasting value because they provide a more direct measurement of cooperation among people within an organization. Given fixed inputs, the shorter the frequency of the cycle from order to delivery, the more cooperation is taking place among workers. To borrow an analogy from chemistry, only bulk characteristics (such as temperature or pressure) can be measured with a time-averaged picture. The measurement of internal structure requires a frequency-averaged picture (such as an absorption or NMR spectrum). Some day we may be able to measure the focal points for an organization by observing the structure of its frequency spectra of activities.

I'm very glad that the day was near! Note that although the modelling done in this paper was applied to firms within a market, using journal entries, the same type of modelling could be done to study the characteristic time-scale of activities within a firm.

U.S. to Toughen Finance Rules

This news has Larry Summers's fingerprints all over it:

• An enhanced role for the Federal Reserve to monitor and address broad economic risks.
• Changes to the way banks are overseen to prevent lenders from shopping among regulators for the easiest supervision.
• More transparency and stricter rules for the way money flows between banks.
• Tougher capital requirements for big banks.
• Consolidation of consumer-protection enforcement.

See earlier comments on Summers's "Regulatory Systems Design" here.

Periodicity in Demand

One of the lovely things about Twitter is how easy it is to use Twitter data. Long time readers will recall that periodicity in supply and demand have been a pet project for your author. Check out this incredible graph of the periodicity in tweets for "movies".

But part of what this shows is that most Twitter users are still syncrhonized on U.S. time. That's going to change. As people in other time zones start using twitter, the periodicity will be less pronounced -- but not because it's not still there. Rather, it will be hidden in comparable phase-shifted signals produced all over the world.

Here's another interesting search: are we in a depression or a recession?

IP Business Congress 2009

Be there or be square:

From 21st to 23rd June 2009, global IP thought leaders will be gathering to attend the second IP Business Congress, hosted by Intellectual Asset Management (IAM) magazine. To be held at the Four Seasons Hotel in Chicago, the IP Business Congress is designed specifically to meet the needs of senior business executives responsible for the creation and management of IP value inside corporations, as well as those who advise them.

Duncan Bucknell has already declared "#IPBC09" as the code word for tweets at the event.

Please shoot me an email if you'll be there and would like to meet up.

More Patent Failure: Bessen and Maskin on Imitation and Innovation

Last year Professor Bessen coauthored a book with Michael Meurer titled Patent Failure, which purported to demonstrate that the patent system was an inefficient mechanism for promoting innovation. See an earlier summary here. Besides its sensationalist title, the book suffered from the fact that its empirical data ended in the 1990s, and looked only at the effects of patents on large corporations, which are always going to be net payers for IP.

Bessen is back now with a Nobel laureate coauthor, and a new line of attack on the patent system. See here:

How could such industries as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both sequential and complementary—as it certainly has been in those industries—competition can increase firms’ future profits thus offsetting short-term dissipation of rents. A simple model also shows that in such a dynamic industry, patent protection may reduce overall innovation and social welfare.

What's the simple model? A geometric series. That is indeed simple!

Formally, consider an infinite sequence of potential innovations, each of which makes the previous generation obsolete and has incremental value v over that generation. Given that the generation t innovation has already been developed, a firm that incurs R&D cost c and participates in the generation t market has positive probability of discovering the generation t+1 innovation. If there is just one firm attempting to innovate, this probability is p. If this firm undertakes R&D in every generation, the expected number of innovations is: [a geometric series in p].

This is not a useful model to employ in analyzing the dynamics of innovation. The problem is that the model starts with the assumption that some innovation exists with probability p before proceeding to calculate the probability of follow on innovations from there. The most interesting question in patent and competition law is the question of how that first innovation got there. Of course patents make licensing follow on innovations more expensive.

Readers of Broken Symmetry were fortunate enough to have Michael Gollin, author of Driving Innovation on recently, to hear a more nuanced albeit less mathematical view on how innovations get there in the first place. See introduction for Michael Gollin here, and click through at the top to read replies. As Mr. Gollin explains in his book:

Competition drives many innovators. . . . Competition drives many artists, too. It is narrow-minded or naive to suggest, in hindsight, that there was no need to provide an incentive or reward in these close races on the theory that one or the other of these innovators would have reached the same result eventually. This is like watching one runner cross the finish line behind another and concluding that because they were both running that there was no need to organize a race. Without the race, neither would have run as fast, if they ran at all. The question is not just whether people will innovate as quickly, but whether they will do innovative work at all. When there is a race, especially one with a prize, people join in, and it is natural for them to want to win, and that drives them to move quickly. Patents and other intellectual property help encourage innovation races.

Unfortunately, Bessen and Maskin, like so many others, fail to adequately account for the opportunity cost of not having a competition at all. On the plus side, it is heartening to see academics moving away from the modified neoclassical paradigm accepted as gospel in the law and economics community.

But perhaps even worse than the simple model is their facile treatment of the "evidence" to support its conclusions:

A survey of company executives concluded “...all company officials interviewed agreed that no company had ever been prevented from entering the semiconductor business because of patents, nor had any company ever been refused a patent license."

Give me a break guys. What else were they going to say? Couldn't they at least have addressed the point that semiconductor and software were more capital intensive in real terms during this time period?

But I sympathize with their predicament here. It really takes some creative modeling to explain how the software and semiconductor industries have had less R&D spending and productivity growth over the past couple of decades than they did before. That's not a proposition that I would want to try to prove.

Natural Selection for Least Action by Kaila and Annila

Available here:

The theory of evolution by natural selection, when formulated in terms of chemical thermodynamics, is easy to connect with the principle of least action, which also is well established in terms of energy (Maslov 1991). In accordance with Hamilton’s principle (Hamilton 1834, 1835), the equivalence of the differential equation of evolution and the integral equation of dissipative motion is provided here, starting from the second law of thermodynamics (Boltzmann 1905; Sto¨ltzner 2003). In this way, the similarity of the fitness criterion (‘take the steepest gradient in energy’) and the ubiquitous imperative (‘take the shortest path in energy’) becomes evident. The two formulations are equivalent ways of picturing the energy landscape in flattening motion. Thus, there are no fundamentally new results. However, as once pointed out by Feynman (1948), there is a pleasure in recognizing old things from a new point of view.

I'll have to scratch my head on this one for a while.

Another way for University Researchers to Keep Abreast of Commercial Applications

Tech Transfer News reports:

With most university TTOs looking for ways to cut costs or bring in new sources of revenue, here’s a new twist: instead of spending budget dollars on outside patent evaluation services, one university lab is turning the tables and has been engaged by an alternative energy company to assist in evaluating its fuel cell patent portfolio. Given the expertise in specific technologies residing in university research centers, could this be a new area of opportunity?

Why Waste Time and Money Inhibiting Innovation?

As explained earlier this week, if innovation requires the help of a field of experts, why do we pursue policies that thin out that field?

Thanks to the Employ American Workers Act (EAWA), which was folded into the stimulus bill, it's become harder for companies getting government support to hire skilled immigrants with H-1B visas -- they'll have to show they haven't laid off or plan to lay off an American from a similar occupation.

Harald Weinrich on the Connection Between Time and Money

From On Borrowed Time:

In the credit system as it functions in the modern industrial world, money is closely connected with time, and more precisely with the deadline-period. That for society this is a daring, risky, fortune-hunting connection is already shown by the fact that Benjamin Franklin's well-known saying, "Time is money," is not reversible. Although time (in the form of life-time) can easily be exchanged for money, according to the rules of labor and commerce, the money received cannot be re-exchanged for time.

Seneca on the Price of Life

From Seneca On the Shortness of Life:

That advocate is lionized throughout the whole forum, and fills all the place with a great crowd that stretches farther than he can be heard, yet he says: "When will vacation time come?" Everyone hurries his life on and suffers from a yearning for the future and a weariness of the present. But he who bestows all of his time on his own needs, who plans out every day as if it were his last, neither longs for nor fears the morrow. For what new pleasure is there that any hour can now bring? They are all known, all have been enjoyed to the full. Mistress Fortune may deal out the rest as she likes; his life has already found safety. Something may be added to it, but nothing taken from it, and he will take any addition as the man who is satisfied and filled takes the food which he does not desire and yet can hold. And so there is no reason for you to think that any man has lived long because he has grey hairs or wrinkles; he has not lived long—he has existed long. For what if you should think that that man had had a long voyage who had been caught by a fierce storm as soon as he left harbour, and, swept hither and thither by a succession of winds that raged from different quarters, had been driven in a circle around the same course? Not much voyaging did he have, but much tossing about.

. . .

Life is divided into three periods—that which has been, that which is, that which will be. Of these the present time is short, the future is doubtful, the past is certain. For the last is the one over which Fortune has lost control, is the one which cannot be brought back under any man's power. But men who are engrossed lose this; for they have no time to look back upon the past, and even if they should have, it is not pleasant to recall something they must view with regret. They are, therefore, unwilling to direct their thoughts backward to ill-spent hours, and those whose vices become obvious if they review the past, even the vices which were disguised under some allurement of momentary pleasure, do not have the courage to revert to those hours. No one willingly turns his thought back to the past, unless all his acts have been submitted to the censorship of his conscience, which is never deceived; he who has ambitiously coveted, proudly scorned, recklessly conquered, treacherously betrayed, greedily seized, or lavishly squandered, must needs fear his own memory. And yet this is the part of our time that is sacred and set apart, put beyond the reach of all human mishaps, and removed from the dominion of Fortune, the part which is disquieted by no want, by no fear, by no attacks of disease; this can neither be troubled nor be snatched away—it is an everlasting and unanxious possession. The present offers only one day at a time, and each by minutes; but all the days of past time will appear when you bid them, they will suffer you to behold them and keep them at your will—a thing which those who are engrossed have no time to do. The mind that is untroubled and tranquil has the power to roam into all the parts of its life; but the minds of the engrossed, just as if weighted by a yoke, cannot turn and look behind. And so their life vanishes into an abyss; and as it does no good, no matter how much water you pour into a vessel, if there is no bottom21 to receive and hold it, so with time—it makes no difference how much is given; if there is nothing for it to settle upon, it passes out through the chinks and holes of the mind. Present time is very brief, so brief, indeed, that to some there seems to be none; for it is always in motion, it ever flows and hurries on; it ceases to be before it has come, and can no more brook delay than the firmament or the stars, whose ever unresting movement never lets them abide in the same track. The engrossed, therefore, are concerned with present time alone, and it is so brief that it cannot be grasped, and even this is filched away from them, distracted as they are among many things.

. . .

And so when you see a man often wearing the robe of office, when you see one whose name is famous in the Forum, do not envy him; those things are bought at the price of life. They will waste all their years, in order that they may have one year reckoned by their name. Life has left some in the midst of their first struggles, before they could climb up to the height of their ambition; some, when they have crawled up through a thousand indignities to the crowning dignity, have been possessed by the unhappy thought that they have but toiled for an inscription on a tomb; some who have come to extreme old age, while they adjusted it to new hopes as if it were youth, have had it fail from sheer weakness in the midst of their great and shameless endeavours. Shameful is he whose breath leaves him in the midst of a trial when, advanced in years and still courting the applause of an ignorant circle, he is pleading for some litigant who is the veriest stranger; disgraceful is he who, exhausted more quickly by his mode of living than by his labour, collapses in the very midst of his duties; disgraceful is he who dies in the act of receiving payments on account, and draws a smile from his long delayed heir.

Comments on Julian Barbour's Essay The Nature of Time

Barbour won an essay contest on the subject of time. See here.

Barbour's clever argument is that our experience of time is always mediated through a comparison of the relative movement of two systems. A clock is simply a dynamical system that is phase-locked with another dynamical system, both of which satisfy a principle of least action.

In a key passage, Barbour takes issue with Einstein's definition of a clock, which is (basically) anything periodic that passes through an identical phase. Here are Barbour's criticisms:

First, no system ever runs through identical phases, so this is an idealization that hides the true nature of time; it lacks Poincare's insistence, which I have repeated, that only the universe and all that happens in it can tell perfect time. Second, Einstein's clock cannot measure time continuously. It can only indicate that a given interval has elapsed when identical phases recur. It can say nothing about the passage of time in intervals within phases.

Barbour's first point is true, but irrelevant to distinguishing between Einstein's definition of time and his own. Of course Poincare is right that the entire universe would provide the best frame of reference for time. But we cannot measure the entire universe, only a part. Is it possible, then, to know whether a given system obeys the principle of least action with perfect accuracy? Given these practical limitations, there is no obvious benefit that I can see to denying any reasonably periodic recurrence of phase the label of "clock." It is a matter of common knowledge that the things are not perfectly accurate.

Barbour's second point is partly true and partly false. It is true that Einstein's clocks could not measure time continuously. But this is just another way of making his first point. Again, until we become gods, we must content ourselves with approximations of whatever we seek to measure.

But it is plainly false that Einstein's clocks can say nothing about the passage of time in intervals within phases. They can say something about anything that happens within their period of oscillation at an interval of twice their period or longer.

The philosophical point here is that we ought to forget about deciding whether or not time exists in some metaphysical sense, and get down to the business of making use of it in a physical one.

Or to put it another way, here is Harald Weinrich in On Borrowed Time:

Considered in relation to the body, the sense of time can be either added to the canon of the five senses as a "sixth sense" with the same status as the others, or identified as superior "common sense" (sensus communis, bon sens) that is the psychic coordinator of all the other senses. In either case, the sense of time is a "real," that is, corporeal, sense, because it has its own bodily organ -- according to the older view, the temples, and according to the modern view, the circulation of the blood and its rhythmical pulse beat. Although we generally remain unaware of it, like the other senses, in crises it will be perceived beating on the surface of the body. However, since evenly flowing circulation of the blood is its condition, the sense of time takes on a special anthropological status insofar as it is at the same time an internal sense, as the only one that determines the beginning and the end of human life-time. To that extent we can say of the sense of time, and of it alone, that it creates or abolishes the presuppositions not only for itself, but also for all the activities of the other senses.

To put it still another way, since it is impossible for the future to be determined from the past, we should remain agnostic about applications of our theories that purport to say things about the universe or even about next week.

Revitalizing a Culture of Innovation in the United States

Innovation flows in cycles. Ideas are generated by individuals, evaluated by a field recognized as experts in a domain, and either accepted or rejected as creative contributions. Over many cycles, the domain evolves with the consensus of its experts.

Perhaps because of our cultural history of rugged individualism -- a culture that rightly praises the lone artist, inventor, or poet --, our thinking about innovation tends to start and end with individuals. We have come far enough in our understanding that it is clear that a formula for individual creativity, if one exists, is so complex a mix of nature and nurture -- of genetic endowments and family, cultural, and social influences -- that there cannot be enough certainty to justify political intervention at this level of social life.

We should not conclude from this, however, that there is nothing that can be done to promote innovation. New and useful ideas may be generated at apparently random intervals by creative individuals, but the field entrusted with defining a domain of knowledge may be more or less receptive to those ideas. Somewhat paradoxically (since a field of experts is nothing more than a group of creative individuals, which I have denied we understand well enough to regulate), we do understand enough about what makes a field more or less receptive to new and useful ideas to justify a few political interventions. The reason for this is simple: We have not (at least not until recently) had the technological capacity to store and process enough information about individuals to have certainty about them. The same is not true of groups. We have retold, recorded, and revisited histories of various groups of people for thousands of years.

What are the lessons of that history? Painted in broad brush strokes, they are summarized by Csikszentmihalyi in his work on Creativity:

Better training, higher expectations, more accurate recognition, a greater availability of opportunities, and stronger rewards are among the conditions that facilitate the production and the assimilation of potentially useful new ideas.

These characteristics have been found in every great civilization, be it Greece, Rome, Florence, Venice, Victorian England, or the Silicon Valley and New York of today. Our civilization is now in crisis, and innovation offers it its best hopes for the future. We must save ourselves from this crisis by learning new and useful ways of living. To that end, we could do worse than to make our many fields of endeavor more receptive to the new and useful ideas of individual artists, authors, and inventors.

Here is a sketch of how reform might be accomplished:

• Training: We have the best universities in the world. Lately, they have stayed that way because they have been fed by a stream of immigrants who are eager to learn and have been raised in cultures that place a high value on formal education. Art, mathematics, music, and science are hardly valued in our culture the way they were many years ago. When budget cuts are needed, some of these are first to go. Math and science are not cool to American kids. Why not?
• Expectations: The answer is expectations. Adults in this country place too little value on learning for the sake of learning. There is something beautiful and good about having an understanding that brings order to the universe, be it artistic, musical, or mathematical. But our expectations for the next generation are only that it will be more practical and prosperous in solving whatever problem is immediately before us. The rational hypothesis has been accepted and become a reality for all too many of us. A more humane hypothesis that recognizes and encourages the enjoyment of learning and discovery must take the side of rational self-interest before our posterity seeks training and rises above our expectations.
• Opportunities: We excel at least in this respect as a nation since indeed opportunities to join a field and contribute to a domain of knowledge are open in the United States even to many beyond our borders. But we should not rest on our laurels, and would do even better by making those opportunities available to even larger groups, especially when it can be done at low cost. Why not let students who graduate with Ph.D.s from U.S. universities remain in the U.S. if they so choose? At least we should not use money to make fewer opportunities available!
• Recognition: If we are lucky, our culture will evolve to more widely value creativity. In the mean time, the recognition sought by many creative individuals will be not (or not only) the recognition of experts in a given domain, but the recognition of the managers and investors who decide what new and useful ideas are accepted for development, marketing, and distribution to the whole of society. Those managers and investors should be held to the standards of public service commensurate with their level of responsibility to society as a whole. Although government regulation has failed again and again to keep up with changes in a given domain, the web of knowledge that is being spun with new technology offers us all a chance to hold these leaders responsible when their decisions are too short-term or provincial. We should expect these leaders to establish a public presence on the Internet, and to have at least some channel for receiving feedback from people other than the ones they see and talk to on a day to day basis.
• Rewards: For the truly creative individual, seeing a new and useful idea accepted into the domain is its own reward. Yet material and psychological needs remain. Material needs are often met in this country -- although it certainly harder for the average artist and author now than it was before digital performances were available to everyone. But psychological needs for reward and recognition remain. Without some reward or recognition, there is no game to be played, no competition to be won. If competition is an engine of creativity, then rewards should be set commensurate with the importance of the creative contribution. Our patent and antitrust systems are perhaps the most sophisticated means for maintaining such competitions that the world has ever known. We should beware of cutting back at the rewards of patenting when we are so in need of new and useful ideas.

Sen on Smith

Trenchant commentary on the crisis:

Smith rejects interventions that exclude the market—but not interventions that include the market while aiming to do those important things that the market may leave undone.

For earlier commentary on a similar theme see here and here.