Economic Nonsense: 35. Big companies cut safety & build in obsolescence to boost profits

If big companies actually did this they would be very silly indeed, and would not remain big companies for long.  What companies want is satisfied customers, preferably repeat customers.  They want customers to value what they are buying, and to come back for more.  They want customers who will spread the word and encourage others to become buyers as well.

One thing companies do understand is that reputation matters.  If they made unsafe products that became unusable, they would soon gain a reputation bad enough to deter buyers.  Buyers are not captive; they can turn to other firms.  It is because of this that firms compete against each other, trying to outdo each other in the value they provide.  That value includes both safety and quality.

Some products do become obsolete, of course.  In areas characterized by innovation and rapid progress, this year’s wonder product can be out of date in a few year’s time, or even sooner.  Most buyers would not want a computer or a phone that would last 50 years.  There would be no point.  But this is not obsolescence that is deliberately built in; it is obsolescence brought about by improvement.

Because firms compete against each other, they can attempt to occupy different market niches.  Some people would prefer to buy things that are cheap and cheerful and not as long-lasting, rather than things that are more durable, but cost significantly more.  Competition allows both types of people to be satisfied.

The claim that companies cut safety and build in obsolescence is often made by people who are simply anti-business, and these are usually people who do not understand what business is all about.  They think business is some kind of conspiracy against the public and that firms make profits by swindling people.  It is in fact about supplying value for money that will leave both buyer and seller feeling they have gained by the transaction.  This is far more likely to be achieved by selling safe products that are long-lasting enough to satisfy customers than it is by cheating them.

Unproductive patents

Patents are a state-granted property rights, designed to promote innovation and the transfer of knowledge. They grant the holder a time-limited, exclusive right to make, use and sell the patented work, in exchange for the public disclosure of the invention. This, so the theory goes, allows creators to utilise and commercially exploit their invention, whilst disclosing its technical details allows for the effective public dissemination of knowledge.

However, complaints that the patent system is broken and fails to deliver are common.

Patent Assertion Entities (or ‘Patent Trolls’) buy up patents simply to threaten accused infringers with (often dubious) lawsuits, and are estimated to cost American consumers alone $29bn annually. Another scourge are the ‘patent thickets’ made up of overlapping intellectual property rights which companies must ‘hack’ through in order to commercialize new technology. These have been found to impede competition and create barriers to entry, particularly in technological sectors.

Even thickets and trolls aside, using the patent system can carry high transaction costs and legal risks. Litan and Singer argue that this prevents many small and medium businesses from utilizing the system, with over 95% of current US patents unlicensed and failing to be put to productive use. This represents a huge amount of potentially useful ‘dead’ capital, which is effectively locked up until a patent’s expiry.

There are plenty of ways we can tinker with the patent system to make it more robust and less expensive. However, they all assume that patents do actually foster innovation, and are societally beneficial tool.

A number argue that even on a theoretical level this is false; the control rights a patent grant actually hamper innovation instead of promoting it. Patents create an artificial monopoly, which results, as with other monopolies, in higher prices, the misallocation of resources, and welfare loss. Economists Boldrin and Levine advocate the abolition of patents entirely on grounds the that there is no empirical evidence that they increase innovation and productivity, and in fact have negative effects on innovation and growth.

A new paper by Laboratoire d’Economie Appliquee de Grenoble, authored by Brueggemann, Crosetto, Meub and Bizer backs this claim, by offering experimental evidence that patents harm follow-on innovation.

Test subjects were given a Scrabble-like word creation task. Players could either make three-letter words from tiles they had purchased, or extend existing words one letter at the time. Those who extended a word were rewarded with the full ‘value’ of that word, creating a higher payoff to sequential innovation. In ‘no-IP’ (Intellectual Property) game groups, words created were available to all at no cost. In the IP game groups, players could charge others a license fee for access to their words.

The results are striking:

We find intellectual property to have an adverse effect on welfare as innovations become less frequent and less sophisticated…Introducing intellectual property results in more basic innovations and subjects fail to exploit the most valuable sequential innovation paths. Subjects act more self-reliant and non-optimally in order to avoid paying license fees. Our results suggest that granting intellectual property rights hinders innovations, especially for sectors characterized by a strong sequentiality in innovation processes.

In fact, the presence of a license fee within the game reduced total welfare by 20-30%, as a result of less sophisticated innovation. Players in these games used shorter, less valuable words, and in order to avoid paying license fees would miss innovation opportunities which were seized upon in no-IP games.

The authors suggest that patents could be harmful in all highly sequential industries. These range from bioengineering to software, where the use of patents has been strongly criticized, through to pharmaceuticals, where the use of patents is much more widely accepted. If patents really do restrict follow-on innovation even remotely near as much as suggested, the implications could be huge.

Of course, the study is only experimental and far less complex than real life, but it’s a useful contribution to the claim that patents do more to hinder than to help.

Getting educated – like it’s the 21st century

Innovative independent institutions are for those who can afford it and the rest will make do with the stagnant state school system: a status quo forthcoming generations should accept no more. An education revolution is on the horizon and Scotland, following its anticlimactic devolution of education, could lead the change. Solutions to the present state have existed for decades and – if actualised – promise to reinvent the way schooling is viewed for good. The rise of ideas meriting attention must coincide with resolved political leadership to eliminate inertia impeding the education model’s evolution.

Shuffling taxpayers’ money back and forth between priorities has left us at a dead-end off the path to progress. Free university tuition fees for the wealthiest in Scotland are funded by taxes from the pockets of school-leavers who have gone straight into the job market. College places – the stepping stone to higher education for many young people – have suffered drastic decline after a sudden culling of courses. The Scottish government now funds free school meals for every child, regardless of need, until Primary 3. Meanwhile the poorest are taxed on almost half their income.

Politicians with the guts to be radical in education are scarce but an alternative to spending more money is necessary. Improving the quality of state schools from the heart of government has failed, and when not completely, has failed to achieve anywhere near the success possible if the public had the freedom to choose their schools. This includes, most importantly, having the pick of the private sector’s offerings. The idea is straightforward: individuals choose the best educational options available to them with their own interests in mind. A demand for the best quality schools that inevitably ensues is met on the supply side by a multiplication of the best schools and practices. The poorest schools and outdated methods become null and void, unwanted, and die out faster.

Placing choice in the hands of those the decision affects generally does not fail to deliver the goods. Products, services and technology once only enjoyed by the wealthy are now widespread and accessible for the common man. But education has not evolved like everything else. So rare are independent schools that most of the existing tiny private sector is branded elitist. And so self-deprecating are we encouraged to react to our great educational institutions that the recurring “Should private schools be banned?” debate is taken seriously and considered the only radical option. One day, these leading independent schools, though it will require us to be radical in the opposite direction, could be accessible to the average person too.

School vouchers is the practical policy in which this school choice could take shape. The voucher would be a means of subsidising the child as the consumer; instead of subsidising the state’s provision as happens now. Accountability and efficiency have so far been lost while politicians spend other people’s money on other people’s education. Each voucher would represent the cost of the state educating the child. Of course there are then many ways the policy can be created to cater to various factors and income backgrounds. First proposed by Milton Friedman all the way back in the 1960s, school vouchers have featured in UK Party manifestos but have never come to fruition here.

The mantra of Scotland’s current leadership advocates their goal of a fairer Scotland we are all supposed to be striving towards. These are mere words. True fairness is the enhancing of the freedom to choose on the part of everybody. And as it stands this process is not happening. Implementing choice in policy is absolutely imperative as it will not just be conducive to overall improvement of education but it is a tool to innovate and evolve – the key to advancement.

Europe’s Digital Dirigisme

Google has recently announced that it is ending its Google News service in Spain before a new intellectual property law – dubbed the ‘Google tax’ – requires Spanish publishers to charge the company for displaying snippets of their articles.

Whist newspapers claim that Google infringes copyright by using their text, Google argues that their News service drives traffic to the featured websites, boosting advertising revenues. Certainly, Germany’s biggest publisher Axel Springer scrapped plans to block Google from their news items when they discovered that doing so caused their traffic to plunge.

This is yet another complication of Google – EU relations. In May, the European Court of Justice ruled in favour of the ‘right to be forgotten’, which has so far resulted in over 250,000 takedown requests. Building on this ‘success’, the EU now wants to force search engines to scrub ‘irrelevant or incorrect’ (read: inconvenient) links at a not just a European but a global level.

And as the European Commission’s four-year antitrust investigation into Google drags on, the European Parliament symbolically voted to break up its operation and ‘unbundle’ its search function from other services. Whilst the parliament has no power to touch the internet giant, it sends a very strong message as to what European politicians want.

European politicians portray such moves as guarding against monopoly, enabling fair competition and safeguarding the privacy of individuals. However, it’s not obvious that the way Google presents search results is to the detriment of its actual users (as opposed to rival firms), whilst the ‘right to be forgotten’ sets a dangerous precedent against internet openness. American firms and politicians have responded harshly to the actions, branding them politically motivated, anti-competitive and detrimental to trade relations.

European policy makers should be very careful not to cause harm to the digital economy through politicized regulation. Policymakers may be concerned by the digital domination of American firms like Amazon, Facebook and Google ­­ – yet it’s worth noting Europe fails to produce many rivals of its own.

As the Eurozone struggles with weak growth and low inflation, the WSJ reports that the number of those engaged in early entrepreneurial activity in countries like Germany, France and Italy (5%, 4.6%, and 3.4% of the population respectively) is a fraction of those in the US (12.7%). Once they are established, these businesses tend to be smaller and slower-growing than their US counterparts. They also seem less likely to hit the big time: among the world’s 500 largest listed companies, only 5 of the European firms were founded after 1975, compared with 31 from the US and 31 from emerging economies.

Digital policy analyst Adam Thierer argues that the relative performance of US and European tech firms is largely driven by the regulatory culture in each country. US policy makers have by deliberate design fostered a culture of permissionless innovation, which allows and encourages entrepreneurs to innovate, push boundaries and take risks. As a result, the American tech sector has boomed, producing inventions and companies beloved and envied across the world. In contrast, European culture has been far more risk-averse and policy far more bureaucratic. The result of unnecessary regulation and data directives has been a dearth of successful European firms. Those European ‘unicorn’ firms which strike big have overwhelmingly come from countries fairly removed from continental Europe, such as the UK, Scandinavia and Russia.

The EU’s move towards net neutrality regulation, market interventions and tighter data laws will only further disadvantage tech firms. State interference is particularly unhelpful in dynamic, evolving digital sectors, where fast-paced progress is typical and innovation key to staying relevant. Moreover, European policymakers may want to check Google’s power through legislation, but it is large incumbent firms who have the resources and lawyers to comply with new regulation. Those hit hardest are smaller competitors, and the fledgling start-ups the EU should focus on encouraging.

In some sense, European policymakers are onto something with their suspicion of ‘big tech’. The vast majority of UK internet users say that they’re uncomfortable with what they share online and with whom, and even the technophilic Wired ran a recent cover story on how the data industry is ‘selling our lives’. Perhaps people really are fed up of Google, which then only maintains its 90% European market share in search because there’s no decent alternative.

But attacking Google’s influence requires innovation, not regulation. Tech history is littered with market leaders such as IBM, Nokia and AOL who have slid, sometimes quite spectacularly, from the top spot. In tech-orientated sectors it is particularly hard for large firms to stay relevant and embrace new trends ­– let alone to develop them.

To facilitate creative destruction and the emergence of challenger firms, Europe needs a digital policy which is favorable to new technology and experimentation, and which encourages individuals to accept risk and forge ahead with business plans without first jumping through hoops and courting regulators (the trials and tribulations of Uber and Skype spring to mind here).

Blockchain-based projects which aim to ‘decentralize the internet’ and give users more control over their data are part of an exciting peer-to-peer movement which could re-sculpt the shape of the net. But these innovators are entering unchartered territory (a wild west, if you like), and an open and permissive regulatory culture is essential in allowing them to flourish (or fail).

Were Europe to grasp this, the benefits could be enormous. But if European policymakers carry on down their current path of tightening control, we’re likely to see less entrepreneurship, less competition, reduced consumer utility, and probably a lot more Google.


Are we innovating less?

According to Huebner (2005) the per capita rate of innovation has been falling steadily since 1873 (it doesn’t look quite like that from the chart below, which is just of patents, because patent laws changed a lot during the period). He constructs an index of innovation by looking at independently-created lists of events in the history of science and technology and from US patent records and compares them to the world population.

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Woodley (2012), looking at the numbers for a different purpose, compared them with three alternative indices of development, and found that they correlated well with different numbers gathered for different purposes. For example, they correlate highly (with a coefficient of 0.865) with the numbers in Charles Murray’s Human Accomplishment, which quantifies contributions to science and arts partly by how much space encyclopaedias devote to particular individuals.

It also correlates 0.853 with Gary (1993)‘s separate index, which was computed from Isaac Asimov’s Chronology of Science and Discovery. Finally, it correlates with another separate index, created in Woodley (2012), computed from raw numbers in Bryan Bunch & Alexander Hellemans (2004) The History of Science and Technology, and divided only by developed country population numbers in case there is something special about them in creating innovation.

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The result seems quite robust, although I am hoping my friend Anton Howes (who has an excellent new blog on the industrial revolution, and is working on a PhD on innovation and the industrial revolution) will construct an even better index. Should we worry?

There are a few reasons for optimism. Firstly, the population is going up, so per capita declines in innovation are being counteracted by there being more people around to innovate. For example, even if Gary (1993) is right in thinking there has been a roughly five-fold decline in per capita innovation in the past 100 years—there has been almost a four-fold increase in population, balancing much of that out. Secondly, some of the innovations we are getting will allow us to raise our IQ—including genetic engineering and iterated embryo selection—and we know that IQ is one important factor in innovation. Thirdly and finally, there are many countries (such as China and India) who have so far been too poor to have many of their population engaged in innovative activities, but who will surely soon be.