Thursday, November 17, 2011

Guest post: Incremental Technological Growth

This is a guest post written by someone under the pseudonym Nicolas Anelka. This guest is really bad at choosing pseudonyms.

The recent passing of Steve jobs has generated a lot of discussion of the "Jobs" factor, that special something that could explain why the former Apple and Pixar CEO seemed to revolutionize every market and every product segment he laid his eyes onto.

An interesting dissenting voice among the chorus hailing the "genius innovator" in Jobs is New Yorker staff writer Malcom Gladwell. In a recent article in the New Yorker, he makes the point that Jobs did not really innovate, so much as tweak other people's innovations. He didn't invent the mouse and the windows-based UI for PCs; Xerox did, in the 70's. He didn't engineer the first cellphones, or imagine the first 3D movies, or produce the first tablet. The technology underlying all of Jobs' breakthrough products was already there before he came in. His genius, Gladwell argues, consisted in:
[T]aking what was in front of him —the tablet with stylus— and ruthlessly refining it
This view has echoes in the recent growth literature. Gladwell is actually taking his cue from research by Meisenzahl and Mokyr. The authors look at a sample of mechanics and engineers from the British Industrial revolution; they find that a majority of the sample did not contribute to "macro" innovations, that is, the invention of new products and techniques. Instead, they produced "micro" innovations, that is, tweaks and iterations of the other, groundbreaking but imperfect "macro" innovations. Interestingly, 40% of the "tweakers" in their sample did not attend school, but were instead trained through apprenticeship at workshops, the techniques of which they eventually went on to improve on in their own workshops. The widespread amount of tweaking, and the presence of a big workforce with the technical skills to carry it out, was crucial in the Britain's take-off, the authors argue.

Now, for the million-dollar question: is tweaking enough to generate aggregate productivity growth? Yes, argue two recent growth theory papers, one by Lucas (yes, that Lucas) and Moll and another by NYU grad students Tonetti and Perla. Both papers argue, though in different setups, that growth in aggregate labor productivity can be generated just from "unproductive" entrepreneurs replicating the processes and ideas of the "frontier" entrepreneurs, the most productive ones. One can think of it as "beggar-thy-neighbour", or "copycat" growth; another way to view this is through the lens of Gladwell's and Meisezahl-Mokyr "tweaking" concept.

The paper by Lucas and Moll, in particular, is fascinating. In a very simple setup, where firms' only decision is to allocate labor between searching for ideas by observing others, and producing using their own technology, they find that the copycat mechanism is sufficient to generate endogenous growth exactly when the intial productivity distribution has fat tails - that is, when the stock of ideas to discover is, in some sense, infinite. Because finding and adopting better ideas increases the number of firms using good ideas, and in turn, the probability of finding a better idea for those lower down on the productivity scale, there is a positive search externality in their economy: a planner would be keen on introducing a tax that encourages unproductive firms to search, rather than use their own bad ideas to produce stuff.

That is a stunning conclusion. Growth theory, both empirical and theoretical, has been arguing for quite a while that patenting and in general property rights were crucial in promoting long-run productivity growth, because they guarantee the right incentives for entrepreneurs to invest in Research and Development. Endogenous growth in Romer's (1990) model relies on the assumption that innovators are monopolists in the varieties they introduce; otherwise, under perfect competition, the present value of innovation benefits would be eroded down to zero, and any small research cost would drive entrepreneurs away from innovation. In that sense, copying is unambiguously bad for growth.

Lucas and Moll, on the other hand, argue that copying is good. Of course, these are very different models: R&D models of growth focus on what happens at the margin, while copycat models of growth focus on the average shift in productivity, but totally abstract from thinking of "where" the better ideas come from. Still, it raises the possibility that, after all, patenting and protection of innovation may not always be good things. This is something that I always thought was implicit in the law of, for example, industrial patents in France, that guarantee exclusivity only for a limited number of years. But it seemed to also have mattered during the British Industrial revolution. In the sample of Meisenzahl and Mokyr, 54% of the "tweakers" never deposited a patent. What's more, the authors show evidence that the tweakers actively engaged in the exchange and diffusion of their ideas. That begs the question of what the optimal amount of protection of innovators is optimal, in an economy where R&D costs coexist with "copycat" growth is. That question, to the best of my knowledge, is still open. (But my knowledge of this field is not very good).

One point, still: models of "copycat" growth are not really models of tweaking, in that there is no marginal contribution of the copiers to the innovation they replicate. Steve Jobs did, after all, improve on the dismally cluttered tablets of Microsoft, Lenovo and the like when he introduced the Ipad and its blinding simplicity of use. It's unclear whether allowing for tweaking in those recent "copycat" models would significantly alter their predictions - other than making the planner even more willing to incentivize copying. Still, the "Jobs" growth model hasn't yet been (completely) written. Yes, that was a terrible pun; but then again, it was just a tweak on the widely better, millions of jokes that Jobs' passing spurned.

1 comment:

  1. For once I'll comment, Sorry Seb it's not on one of your posts! Nicolas Anelka I'd love to hear more on innovation, growth and the use of patents.