The value of innovation

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Innovation is of course a good thing: so too is the science that leads to lovely new things to innovate with. We're all also well aware of the public goods arguments about science: because it's very difficult to profit from it directly we'll not have enough of it. Thus we need taxpayer support for science, so that we've got lots of lovely new things to innovate with and thus we all get richer. An example of the argument from Colin Blakemore:

PricewaterhouseCoopers estimates that every pound spent on research by the UK Arts and Humanities Research Council sees a rapid return of £10, and £15 to 20 in longer-term benefits........But it’s not just a love of intellectual pursuits that justifies the nearly £3 billion per annum the Government spends through the research councils and the additional £2 billion that is dispensed through the higher education funding councils. It’s the expectation that it will deliver benefits for UK plc — “outcomes" in Treasury-speak.

However, we do also have to add what we know from what I think is one of the great research papers of all time: Schumpeterian profits in the American Economy.

We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

In more detail, only 3% or so of the value created by new technologies goes to the entrepreneurs, 97% goes to the rest of us lucky people who get to use the new technology. In one way this bolsters the argument that science should be heavily funded: look what we all get from it!

In another, the picture is not so clear. For the science is a public good, as we've agreed, which is why it needs funding in the first place. But as the science is a public good (non-rivalrous and non-excludable) we don't actually care where it is done nor who funds it: only that someone does. Further, if all but some tiny amount of the value of the technologies created by the science comes from the use, not the making or manufacturing of them, then we don't really care where that making or manufacturing is done either. All we care about, rationally, is that we get to use the new gear. And the end result of that chain of reasoning is that there's no real reason why we should be insistent upon funding "British" science, or "British innovation" nor even "British manufacturing". As long as someone funds it, somewhere, why should we care?

If the Americans decide to tax themselves to fund such activities, why shouldn't we just be free riders on their efforts?

The priorities

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Tony Blair listed his three priorities as "education, education, education," and achieved none of them. There will be a great deal of pressure on the incoming Cameron government and many claims on its urgent attention. Given the limits of parliamentary time and attention, the four which should count are "education, liberty, education, liberty" (in no particular order). If they do nothing else, they should reverse the erosion of our liberties by setting up a one-year judicial commission to review the state of our liberties and make recommendations accordingly. I set out in the Telegraphhow this can be done.

No less important is the permanent change that can be made to our schooling by empowering parents with a choice of school backed by the funding their taxes have paid for. Provided this is backed by measures which enable a proliferation of new schools, public and private, there is no single measure which can alter the political landscape so much, or with such lasting effect.

No doubt we will be told that times are hard, money is tight, and time is short. Maybe this will be true to some extent. We do not expect miracles. But we do expect the tide which has flowed against our liberties to be turned back, and lost ground regained. And we do expect that education will finally be reformed so that every child, regardless of their background, will gain the chance to succeed.

This is not an ambition or a distant hope, it is a minimum. Without these two, any new government will go down as a failure which turned its back on the untrodden heights and lost the goodwill that might have sustained it.

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Tories hire Nudge author Thaler

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Will Nudge author Richard Thaler cut regulation or build a new Tory Nanny State?

University of Chicago economist Richard Thaler has reportedly joined the Conservative party as an adviser on regulatory issues. This may be good news for the cleanliness of British urinals, but not much else.

Professor Thaler is the doyen of the school of ‘behavioural economics’, which is based on such non-astonishing insights as the fact that human beings are not wealth-maximizing automata; they procrastinate, lack self-control and occasionally act like headless chickens. He recently wrote an article in The New York Times in which he compared the average punter to Homer Simpson! Behavioural economics thus represents yet another attack on the straw man notion that the validity of free markets depends on rational humans and perfect markets. Adam Smith certainly never made any such claims. He noted that it was all about higgling, bargaining and propensities to ‘truck, barter, and exchange’. Behavioural economics is yet another excuse for intervention, as if the return of Keynesianism wasn’t bad enough!

The Bible of the ‘new’ economics is Professor Thaler’s Nudge: Improving Decisions about Health, Wealth, and Happiness, which he co-authored with Cass Sunstein, President Obama’s regulatory czar. The book is aimed at promoting an oxymoronic ‘paternal libertarianism,’ a ‘real Third Way’. Thaler and co-author Sunstein make the claim – much beloved of Communist rhetoricians – that there is no ‘real’ freedom. Since all choices are made within particular ‘contexts’, policymakers are obliged to become ‘choice architects’, subtly rigging our environment to stop us making the ‘wrong’ decisions. For support, the authors quote – with an example whose bizarre triviality you could not make up if you were deliberately trying to discredit them -- how Dutch airport authorities reduced urinal spillage by 80% by etching target flies into the porcelain!

It seems that people can’t even piss straight without someone in authority telling them how.

Monopoly empowers unions

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One of the merits of competition is that it limits the power of producers. Most people focus on how firms have to compete with each other if consumers have a choice, but competition also limits the power of organized labour. The degree to which it can impose uneconomic terms on employers is severely limited if customers can move elsewhere and cause their employer to go under. Where competition is introduced into a state monopoly, it also limits the power of the unions to put political pressure on government by interrupting the service.

When the UK featured many state-owned monopolies, strikes were a common feature as unions exploited the power which monopoly gave them. But it was not only privatization and the competition which usually accompanied it which undermined their power; technology played an important role. The Post Office provides a classic example.

The fax machine (if anyone remembers it!) spread rapidly because the monopoly post service could not be relied upon. Motor and pedal cycle couriers spread through our cities to exploit a loophole that allowed expensive alternatives to the Royal Mail. What unions do not seem to grasp is that it is their exploitation and abuse of monopoly power that speeds the adoption of alternative technologies. If the service were reliable and good value, many of these technologies would develop more slowly or not at all.

It is easy to predict the consequences of yet another impending postal strike. People will rapidly get into the habit of using technological alternatives to the Royal Mail, and will not return when the service resumes. They will use such alternative methods of conveyance as are allowed, and many will not return from those, either. The Royal Mail itself will find its business diminished and will need to cut its cost further… At the bottom of that vortex is a plug-hole.

Meanwhile, Lord Mandelson could earn a load of brownie points by empowering the Boy Scouts to deliver Christmas mail, and allowing charitable organizations to oversee its collection, transport and distribution…

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Tory nudging

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Richard Thaler, co-author of the book Nudge will be joining Camp Cameron as an adviser on regulation. Should the Conservatives form the next government, he will sit in a regulatory “star chamber" designed to analyse the impact and effect of proposed regulation.

Thaler is an American behavioural economist whose work has long been popular with the Conservatives. He argues that the concept of humans as fully rational and logical is wrong; instead, we often react instinctively, affected by emotion or acting in ignorance. In essence, Thaler doesn’t believe that we are entirely capable of making our own decisions. Instead he suggests that the government should create social nudges that encourage and influence us to make the ‘best’, socially useful decision. Examples include presumed consent for organ donation, and the proposed Tory policy of comparing a household’s energy expenditure with their neighbours on the bottom of gas and electricity bills.

Thaler calls such ideas examples of “libertarian paternalism"; they are deemed libertarian because they do not force anyone to change their habits, yet they are paternalistic because they assume that the governments’ desired outcome is the most correct. A major problem is that this work is based upon an individual’s unconscious and psychological reactions to the situations before them. ‘Nudging’ people to act in a certain way requires the manipulation of these reactions, such as our ‘herd instinct’, encouraging people to 'make the right choice'. As Lib Dem MP Danny Alexander claims: “There's something worryingly illiberal about all this Nudge stuff. If governments wanting to change our behaviour don't need to explain what they're trying to do, how they're trying to do it, or what outcome they're after, then they are ignoring what voters want."

The influence of economists like Thaler add to the creation of our Nannying State, where citizens are perceived as too ignorant and base to rely on their own desires and morals. It is difficult to see how principled views such as a reluctance to donate organs can be ob ‘wrong’, even if we do make rash and impulsive decisions in day-to-day life.

One hopes that we have enough awareness not to be nudged. However, if we are as susceptible as Thaler claims it is a serious cause for concern. Perhaps it is better to be shoved than nudged; at least then you can retaliate in self-defence.

My risk not yours

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Your average man, woman or child on the street partakes of risk on a daily basis. It's life. Ninety nine percent of us accept this and glibly stroll into the road safe in the knowledge that having looked both ways there's no traffic. What of that other one percent? Mainly the ones that work for the Health & Safety Executive.

In their bureaucratic fantasy land of the anaesthetised office, cleverly covered in bubble wrap (the office not the desk jockey), including the paper, can't be too careful with that stuff might take your hand off) they dream up more rules and regulations. Attempting to ensure that during any day in Great Britain no one will so much as have a hair on their head bent out of shape. And, no, you can't order everyone to lie in bed all day (yet) as that's cheating, and don't forget bedsores are a risk. For them risk is everywhere: from standing in the shower, to putting on socks, to walking, eating, using your car, your phone...etc. Yet, the majority of us decide not to put our socks on in the shower while attempting to drill through a wall. Why? Because someone else attempted this and managed to pass through the bottom of the bath to the other side.

Anything could happen to anyone at anytime. It doesn't mean that we need an HSE officer standing over us with a clipboard loudly and sharply inhaling every time we raise the level risk. Risk belongs to us. We gather information in the hope of limiting risk. If we choose to ram a knife into the live toaster, then we accept that as we have raised the chances of removing ourselves from the gene pool. Deserving the consequences should the toaster shockingly reject the unwanted metallic intrusion. This is natural selection, not an opportunity for some faceless office wonk to call for a ban of toasters, knives, bread and electricity.

All of which is comparable to asking the police force not to take any risks while protecting the public. Yes, they have.