Broken Symmetry

What's Wrong With Building Trust? Or Why We Need Antitrust Reform More than Patent Reform

Over at Truth on the Market, Thom Lambert asks about:

a print ad, which shows our three rival delivery folks standing outside a school with loads of diet drinks, juices, teas, and bottled waters. Just above the logos of Coca Cola, Pepsico, and Dr. Pepper Snapple, the text reads:

Together, we’ve replaced full-calorie soft drinks in schools with lower-calorie choices.

America’s beverage companies have teamed up to remove full-calorie soft drinks from schools. And we’ve replaced them with lower-calorie and small portion-sized options like juices, teas and waters — reducing beverage calories by 88%. Together with schools, we’re helping kids make more balanced choices every day. Learn more at Ameribev.org.

The actual agreement among the beverage manufacturers doesn’t just remove sugary sodas from schools. It also limits the sizes of the “healthy” drinks sold at schools. In elementary schools, juice and milk drinks cannot exceed 8 ounces. In middle school, the limit is 10 ounces. In high schools, it rises to 12 ounces. Sixteen ounce offerings are forbidden in all schools.

How can this arrangement not run afoul of the antitrust laws? Section 1 of the Sherman Act forbids any contract, combination, or conspiracy (i.e., any agreement) that unreasonably restrains trade. The Ameribev pact amounts to an agreement among competitors to limit market output — i.e., to “restrain trade” that otherwise would occur. The only legal question, then, is whether that trade restraint is “reasonable.”

Under current precedent, I think the arrangement could be prosecuted as an antitrust violation. (Which is not to say that it would; the FTC/DOJ exercise a considerable amount of prosecutorial discretion.) Who in their right mind would want to stop private corporations from voluntarily undertaking a responsibility for public health? Thom's question points to an underlying problem with antitrust theory -- namely, that it emphasizes competition among groups over cooperation within groups as a driver of consumer benefit.

This atomistic conception of competition is derived from an axiom of economic (and, more broadly, social scientific) theory called methodological individualism. In its strongest form, methodological individualism reduces any model of society to an atomistic interaction among individuals. Methodological individualist theories of competition are at the root of many neoclassical economic theories of antitrust law. They are an important part of the explanation for why competition among individuals is given priority over cooperation within groups. Because of methodological individualism, many economists and policymakers are simply blind to the ways in which cooperation within a group can achieve social benefits impossible through atomistic interactions among individuals. Organizations literally reshape individual behavior through (voluntary or, in some cases, involuntary) constraints through group rules.

Thom also mentions the Professional Engineers case. Remember when lawyers, accountants, engineers, and other professionals used to show loyalty to their profession? Antitrust law is partly to blame for discouraging those prosocial norms, and thus indirectly to blame for the deterioration in ethics that have dogged professionals. The alternative explanation that professional ethics have deteriorated due to an increase in diversity in the profession is ahistorical, and even racist. Our professional groups have had to deal with an influx of new cultures and ideologies for long enough to discredit such an alternative explanation.

The language of the Sherman Act is so broad on its face that it has never been interpreted literally. As the Supreme Court has said on many occasions, including most recently in American Needle, read literally, the Sherman Act would proscribe any commercial contract.

The judicial system is the most natural mechanism for antitrust reform, for it is the mechanism that permits experimentation with different theories, which can be tailored to impact only particular companies or industries rather than being applied across the board. That's part of why Alexander Hamilton called it the "least dangerous branch."

Let's hope that as more and more scholars and practicing lawyers recognizing the need for (what Thom calls "prosocial") commitments among groups, that judges in turn will recognize the importance of these commitments to the creation of wealth and happiness within our economy.

AAU Responds to OSTP on Commercialization of University Research

The OSTP extended the deadline for responses to its RFI, and at least part of the reason may have been because of this letter, posted by the Tech Transfer Tactics blog.

The introductory remarks, sadly, play right into the obsolete cultural norm I excoriated in my own letter. Specifically, the AAU says "increased commercialization must not come at the expense of our universities' primary education, research, and public service missions." Why does the AAU think that increased commercialization would come at the expense of these things when there is overwhelming evidence that increased interaction with industry promotes all three?

The AAU then states mysteriously that "It is, in fact, these [public service?] missions that have led to universities' most important contributions to economic development, job creation, and technology commercialization." Huh? Unless I misunderstand the argument, the AAU is saying that we should not promote commercialization at the expense of teaching, research, and public service because teaching, research, and public service are the best way to promote commercialization. Do you want more commercialization or not?

The AAU is abundantly clear, however, on the importance of maintaining unencumbered ownership of its IP. The only sentence that appears underlined and in boldface in their entire letter states: "The current legal framework for university technology commercialization, as set forth by the Bayh-Dole Act of 1980 and implementing regulations, is effective and needs to be maintained."

A flat denial that any improvements could be made to the overall Bayh-Dole framework is an embarrassment to their cause. (Note: the letter actually does say that improvements could be made, but without explaining what improvements, by whom, how, or why. I consider this equivalent to denial.) The only reasoning they offer here (namely, that a one-size-fits-all solution isn't likely to work) seems to cut against their stance since Bayh-Dole does apply to every university the same way!

Let's turn to the numbers they cite from the AUTM, of which they seem proud. They're proud, of course, because their benchmark was tech transfer before Bayh-Dole. According to the AAU (citing the AUTM), fewer than 250 patents issued to universities annually before Bayh-Dole, whereas 3,280 issued in 2008.

Number of patents is a poor measure of innovation, but even by that measure this is nothing to boast about. Over a decade ending in the late 1990s, IBM invested about $2 billion per year into R&D and produced approximately 3,000 patents per year. The AUTM, by contrast, had over ten times that much (over $20 billion per year). Nobody expects AUTM members to be as efficient as a public corporation. (Not that that is such a high bar either.) But couldn't the AUTM have at least done 20% of what IBM did?

Part of the explanation for the discrepancy is right in the intro to the letter: "[I]t is important to recognize that the transfer of new knowledge from universities to the public domain and marketplace occur through a wide range of mechanisms, including publication and the movement of people both into and out of our institutions. (My italics.) Yup, that's right, your patents are headed out the back door.

The rest of the letter is a mixed bag. The AAU seems to have felt obligated to offer affirmative suggestions since it rejected the need for a change to Bayh-Dole. Thus, it blames a "focus disproportionately on revenue generation as opposed to moving new knowledge into the public domain for the public good." (What public good does knowledge do that nobody cares about?! Again, the premise is that making money is mutually exclusive with research and teaching.) This argument is incoherent.

The AAU do make a good point about state policies, however. Some state universities face a huge disadvantage to their local private counterparts (what's up, California?). But other states seem to give public universities a leg up on their private competition, if for no other reason than local alumni don't provide a reliable source of revenue for private endowments.

Then, of course, there is the bogeyman of conflicts trotted out again. I have commented on this point many times before, and so won't repeat what I have to say on this again here. Suffice it to say that if you don't see commercialization as mutually exclusive with teaching and research, than conflicts no longer seem fatal. Transparency and accountability are the tools for handling conflicts, not isolation and (feigned) independence.

Still I would be remisss if I didn't praise the AAU for this modicum of sense that creeps in at page 5:

The human capital aspect of technology transfer is often undervalued, but it is a fact that the students our universities educate and the faculty who conduct our research are usually the most effective means through which translation and technology transfer occurs. For example, many of the most successful university-industry interactions are based on the education and training of students who have the specific skills to meet industry needs, or on relationships that top-notch faculty members have with particular companies. These interactions do not center on intellectual property (IP) at all. Therefore, as new models for commercialization are developed, an emphasis should be placed upon fostering new interactions, relationships, and linkages, both formal and informal, that help to facilitate these efforts. Education and training must also be considered to be major components of such models.

Right. So how again would amending Bayh-Dole to give faculty and students more input into how and when IP is commercialized make tech transfer less effective?

Thought Experiment on Banking Reform

What would result from a law being passed that imposed a high (say 50%) tax on bank profits beyond what could be earned by continuously compounding interest on reserves (say, at a rate fixed to short-term treasuries)?

Would that result be better or worse than permitting particular banks to reap large profits by pioneering new markets that eventually (through slavish imitation) crash, at high cost to the entire economy?

Isn't part of the problem with the financial services industry that it attracts the most aggressive, risk-preferring individuals? Would it be so terrible if those individuals were forced into other professions or jurisdictions?

A de facto Glass-Steagall?

American Needle and the End of Competition

Back in November, I offered a few thoughts on the significance of the Supreme Court decision in American Needle (available today here) for methodological individualist and functionalist theories of the economics of organizations:

The upshot is that social norms can evolve to facilitate group cooperation. These norms, in turn, can play a huge role in promoting health and economic growth. The case of IP licensing by the NFL is an easy example of the economic benefits of cooperation. Competition among the teams for licensing revenue -- which I understand is the norm among MLB teams -- leads to less social benefit for consumers and less revenue for the league. In many contexts, cooperation creates wealth that competition would destroy.

This is not to say that there is no role for antitrust regulation. The point is that regulators should not rely on the prescription of methodological individualists (including, most notoriously, neoclassical economists) that competition is a uniform good. Neither perfect competition nor perfect cooperation is optimal for a society. We must find a balance in which enough competition is permitted to allow existing relationships to be broken so that new experiments with resources, capital, and people can be tried. But we should remember that these experiments have an opportunity cost of stability and efficiency, which is too expensive when there is no theory tested by the experiments.

Sadly, albeit predictably, the Supreme Court today handed down a poorly theorized and thinly articulated restatement of methodological individualist theory. Consider this passage from the opinion at 13:

As Copperweld exemplifies, “substance, not form, should determine whether a[n] . . . entity is capable of conspiring under §1.” 467 U. S., at 773, n. 21. This inquiry is sometimes described as asking whether the alleged conspirators are a single entity. That is perhaps a misdescription,however, because the question is not whether the defendant is a legally single entity or has a single name; nor is the question whether the parties involved “seem” like one firm or multiple firms in any metaphysical sense. The key is whether the alleged “contract, combination . . . , or conspiracy” is concerted action—that is, whether it joins together separate decisionmakers. The relevant inquiry,therefore, is whether there is a “contract, combination . . . or conspiracy” amongst “separate economic actors pursuing separate economic interests,” id., at 769, such that the agreement “deprives the marketplace of independent centers of decisionmaking,” ibid., and therefore of “diversity of entrepreneurial interests,” . . . and thus of actual or potential competition.

In other words, unless you see your self-interest as opposed -- or at best completely orthogonal -- to another's, you can't agree (even informally!) to work together toward a common goal because that would deprive the sacred market of its quota of wasteful speculators, betting against the outcomes that reasonable and well-informed minds agree would be the best for all stakeholders.

That the Supreme Court believes that a diversity of entrepreneurial interests are best promoted by such rules demonstrates their complete lack of on-the-ground experience with how successful entrepreneurial ventures are formed and operated. Successful entrepreneurs succeed because and when able to convince a plurality of actors whose interests are not otherwise aligned to cooperate.

There is silver lining. First, the reasoning in the opinion is so thin and weak, that it cannot hold up long against the rising tide of evidence and theory that demonstrate the benefits of cooperation in fostering growth and differentiation of products and services. Fortunately, the officials now in charge of the DOJ/FTC are better aware of new economic theory.

Second, and far more importantly in the short-run, the actual basis for the holding appears to be very narrow:

The question whether NFLP decisions can constitute concerted activity covered by §1 is closer than whether decisions made directly by the 32 teams are covered by §1. This is so both because NFLP is a separate corporation with its own management and because the record indicates that most of the revenues generated by NFLP are shared by the teams on an equal basis. Nevertheless we think it clear that for the same reasons the 32 teams’ conduct is covered by §1, NFLP’s actions also are subject to §1, at least with regards to its marketing of property owned by the separate teams. NFLP’s licensing decisions are made by the 32 potential competitors, and each of them actually owns its share of the jointly managed assets. Cf. Sealy, 388 U. S., at 352–354. Apart from their agreement to cooperate in exploiting those assets, including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear,to the sale of such items, and to the granting of licenses to use its trademarks.

This passage provides a rudimentary prescription for subject-matter-specific patent pools to avoid antitrust liability. First, the Supreme Court acknowledged that this was a close question -- helpful to any party that distinguishes itself along the lines that follow. Second, the Supreme Court cited favorably the existence of an independent corporation with independent management, which showed no favor to particular owners (because revenue was shared "on an equal basis"). Third, it is the joint management and marketing of individually-owned assets rather than the management and marketing of assets owned in common that rubbed the Supreme Court the wrong way. Fourth, the Supreme Court pointed to the lack of encumbrances on the individually owned assets ("there would be nothing to prevent each of the teams from making its own market decisions" [apart from their agreement to cooperate]). Fifth, in a later passage, the Supreme Court suggests that limiting shareholder assent to management decisions to a mere majority vote would deflect some scrutiny. (This is particularly poor reasoning, however, since a shareholder majority might be controlled by an even more concentrated group!)

Suppose that a group of universities formed a subject-matter-specific patent pool for the purpose of managing and marketing exclusive rights to HIV/AIDS therapeutics. What this passage suggests is that if the patent pool were formed as a corporation with its own managers, and that if each university owner assigned its patent rights to the patent pool, then the pool might be able to market and license the IP without running into antitrust liability.

Not addressed are the more difficult and complex questions of how the board of directors should be constituted, or whether the universities could grant an unrestricted exclusive license to the patent pool and retain ownership so long as the exclusive license was otherwise unencumbered.

Some day, one can only hope, there will be an explicit recognition of the fact that competition is simply one way among many to get people to cooperate, and that it is cooperation rather than competition that is the source of wealth.

Parting thought: This decision is going to give heartburn to lawyers defending joint ventures that develop and license industry standards, but a boost to aggregators operating in the secondary market.

UC Davis Chancellor Katehi on the Future of University and Industry Relationships

From an excellent report and interview by Gene Quinn:

That’s where I’m going to when I speak about public/private at the early stage where people who have the knowledge and interest come and make an assessment. They assess and they look at the landscape intellectually speaking. Considering there are 10 institutions they can even do it in a way that gives them an economy of scale....

And they could bundle together, that’s what we’re trying to do with the Department of Commerce. To tell them what’s the point of going for one patent individually and then cutting the cost of one patent instead of having many in the same area together as a bundle. Because then the research the discovery that they’re doing in the department of commerce and the PTO can be the same. You don’t need to do 5 different independent discoveries for 5 similar things. A lot of patents are in areas and they are interrelated and every time there is a whole new wave of patents there is new discovery with a different examiner and that’s why the cost is very high. So somebody could come and bundle them and then send them.

There are many good reasons for universities to start bundling IP by subject matter. I wish I'd been there to hear her talk. Something I didn't see mentioned is that most (at least research) universities already have organizations setup to manage resources over the time horizons necessary for successful industry collaboration. Endowment offices routinely sign 10-year or longer contracts with private equity funds. Universities already have the personnel and resources they need to transform the way they manage industry relationships. With people like Katehi leading, it's just a matter of time.

Scott Adams on Brain Management

I've had similar thoughts:

During one period of my life I wrote a number of computer programs that involved intense manipulation of objects in my mind, for hours each day. I discovered that it was difficult to be social at night when my mind had been manipulating object during the day. It felt as if I were deep inside a cave and yelling to the people who stood at the cave opening. It seemed as if the practice of programming interfered with, or exhausted, the part of my brain that handles social skills.

Facebook and Privacy

Via Bayesian Heresy, this quote from Susan Herring:

What the statistics point to is a rise in Facebook, a decline in blogging, and before that, a decline in personal Web pages. The trend is clear, Facebook is displacing these other forms of online publication.

It's seems only five minutes ago that Facebook took off because it offered its users a simple, foolproof way to share their lives online without worrying about unknown strangers capitalizing on personal information to perpetrate fraud or abuse. I guess nobody much cared when Facebook opened signups to people without university addresses because it didn't matter so long as only people with university addresses could see your info.

At bottom, the value that Facebook offered its users was simple, easy to understand privacy on the web, and not (at least not at bottom) the network effects of having other friends on Facebook. Friendster and MySpace offered network effects too, and look at where they are now.

Zuckerberg ought to take a page from Apple, and refocus on the core value proposition that Facebook offered: a simple, clean, interface that gives individuals users understanding and control over how they share their information with other people online.

Hundreds of millions of people won't stop using Facebook because it isn't as good as it used to be. But Facebook's clear goal of becoming the market-share leader in social networking online is in jeopardy now.

So Herring was right -- but maybe not anymore.

Riemann and Conditionally Convergent Series

Consider an alternating series -- i.e., a sum of alternating positive and negative fractions:

Did you know, that when N is infinity, by simply reordering the positive and negative terms, this sum can be made to equal any number?

Matt Springer at Built on Facts tells the story.

For me, this is one of the hints that numbers have structure. There isn't a coherent way to understand all of their characteristics without admitting their structural facet.

Posner on Rational Bubbles and Adaptive Expectations

From the Becker-Posner blog:

Thus I don’t think bubble behavior is necessarily or even characteristically irrational. Often, including in the case of the housing and housing-credit bubbles, it is a rational adaptation to uncertainty. It is not efficient behavior in an overall social sense, and so efforts at detection and prevention of bubbles are probably worthwhile. Given the abundant warning signs and explicit warnings of a housing bubble and a housing-credit bubble, the failure of the Federal Reserve under Greenspan and Bernanke, the federal housing authorities, other economic organs of government, and almost the entire economics profession to detect these bubbles cries out for an explanation.

Becker's post is also worth reading.

Gene Fama could have a brilliant second act in his career by tackling non-equilibrium models of bubbles head on. Nobody could think more clearly about non-equilibrum models than he, were he to commit himself to that goal.

Utility is Local and Ephemeral

From a commencement address by Ben Bernanke:

Your sense of how well off you are economically depends a great deal on your expectations and aspirations, which in turn are largely formed by the community in which you live.

Via Tyler Cowen. Not new to readers of B.S., but encouraging to see also is the reference to Csikszentmihalyi's theory of flow:

Another factor in happiness, perhaps less obvious, is based on the concept of "flow."12 When you are working, studying, or pursuing a hobby, do you sometimes become so engrossed in what you are doing that you totally lose track of time? That feeling is called flow. If you never have that feeling, you should find some new activities--whether work or hobbies.

How does the shoe feel on the other foot, Prof. Stone?

Couldn't help laughing at the following:

I am therefore delighted to support Kagan's confirmation. I hope conservatives will do so as well. It is time for us to bring a sense of civility, integrity and mutual respect back to the confirmation process. Five years ago, in an effort to move us in that direction, I wrote post on huffington endorsing the confirmation of John Roberts as Chief Justice of the Supreme Court ("John Roberts: Bush's Blink,"July 27, 2005).

Prof. Stone neglects to mention his partisan attack on the Alito nomination, which intervened:

Whatever else Judge Alito may or may not have made clear about his views on such issues as abortion, federalism, and religious freedom, he has certainly made clear that he has no interest in restraining the acts of this commander-in-chief. That, in my judgment, poses a serious threat to the nation, and is a more than adequate reason for the Senate – Republicans and Democrats alike – to deny his confirmation to the Supreme Court of the United States.

What Lessig has to say on the nomination is more interesting.

Reprise: An Economy Made of Glass

Want a handwavy physics-based explanation for what happened at 2:45 p.m. on Thursday, May 6, 2010? Here's a post from the B.S. archives:

[I]f an economy is modeled as cross-linked clusters of synchronized oscillations, then we might expect to see viscoelasticity and time-dependent transitions in its equilibriums also. Should bubbles and crashes be modeled as viscoelastic creep?

Such an analogy might offer practical value to financial regulators. Generally speaking, the fragility of a glass will depend on the size and shape of the molecular clusters and the number of cross-links among them. The bigger the clusters and the more the cross-links, the more fragile the glass to external shocks. Smaller clusters and fewer cross-links mean less viscosity and elasticity.

We're so heavily cross-linked through digital exchanges and statistical arbitrage, when that big market sell order came through for P&G, the whole market splintered into a thousand desynchronized clusters.

Something I'd like to read more about is what happened in the bond markets at 2:45 p.m. Anybody have a link? Is it the case that credit still gets traded almost entirely by humans? I generally wonder why we don't trade credit the way we trade equity. What are the historical and practical reasons for the fact that we have public indices for equity, but not debt?

Feedback Loops in Monetary Policy

From Nick Rowe:

There are two sorts of countries: countries that can print money to pay their sovereign debts; and countries that can't. Canada is a printer; Greece is a non-printer. Both sorts of countries can get into trouble if they issue too much sovereign debt; but they get into very different types of trouble. Printers get into negative feedback trouble; non-printers get into positive feedback trouble. Positive feedback is always worse than negative feedback, when a bad thing happens. (And positive feedback is always better than negative feedback, when a good thing happens).

For me, via Arnold Kling.

I am really happy to see domain experts applying systems theory to monetary policy. This particular story could be improved by taking more of the transfer function into account -- which is a paraphrase of Prof. Kling's response. The relative magnitude, phase shift, and latency to the feedback can effectively preclude damping. In this case, the time horizons of debt may be so much longer than the rise in inflation that the negative feedback may be too slow to check inflation.

One of these days a few electrical engineers ought to sit down with some economists and figure out where how the analogies between analog circuit elements and economic variables map. We can't assume linearity in the general case, of course. But the success of integrated circuit technology has been due, in part, to our ability to break circuits up into basic elements (capacitors, resistors, inductors, voltage sources) and then recombine them into more complex structures. Securitization and insurance work like amplifiers for cash-flow, for example. Can we break these contracts up into more fundamental units?