Those of us who edit for a living, and especially those of us whose working-place value-added comes about by subtracting from the length of early drafts, will appreciate the comments of best-selling writer Stephen King in his On Writing: A Memoir of the Craft (quoting here from the third edition in 2000).

On the value of having a good editor (p. 13):

The next time you read about a \”bridge to nowhere\” or a giant infrastructure project that started and then stalled, you may wish to mutter to yourself  teh \”Iron Law of Megaprojects: Over budget, over time, over and over again.\” It\’s a coinage of Bent Flyvbjerg. For an overview of his arguments, you can check this Cato Policy Report (January 2017), which in turn is based on this article from the Project Management Journal (April/May 2014). In the Cato report, Flyvbjerg writes:

Megaprojects are large-scale, complex ventures that typically cost a billion dollars or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people. Examples of megaprojects are high-speed rail lines, airports, seaports, motorways, hospitals, national health or pension information and communications technology (ICT) systems, national broadband, the Olympics, largescale signature architecture, dams, wind farms, offshore oil and gas extraction, aluminum smelters, the development of new aircrafts, the largest container and cruise ships, high-energy particle accelerators, and the logistics systems used to run large supply-chain-based companies like Amazon and Maersk.

For the largest of this type of project, costs of $50-100 billion are now common, as for the California and UK high-speed rail projects, and costs above $100 billion are not uncommon, as for the International Space Station and the Joint Strike Fighter. If they were nations, projects of this size would rank among the world’s top 100 countries measured by gross domestic product. When projects of this size go wrong, whole companies and national economies suffer. …

If, as the evidence indicates, approximately one out of ten megaprojects is on budget, one out of ten is on schedule, and one out of ten delivers the promised benefits, then approximately one in a thousand projects is a success, defined as on target for all three. Even if the numbers were wrong by a factor of two, the success rate would still be dismal.

A common comeback to the Iron Law of Megaprojects is that if we pay attention to it, we will be so dissuaded by costs and risks of megaprojects that nothing will ever get done. Alfred O. Hirschman offered a sophisticated expression of this concern in his 1967 essay, \”The Hiding Hand.\”  Hirschman argued there there is rough balance in megaprojects: we tend underestimate the costs and problems of megaprojects, but we also tend to underestimate the creative with which people address the costs and and problems that arise. (This is of course similar to the classic argument that without a dose of irrational \”animal spirits,\” leading entrepreneurs to ignore risks and difficulties of starting a business, there there would be too little entrepreneurship provided.) Hirschman wrote:

We may be dealing here with a general principle of action. Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature o[ the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be. 

Or, put differently: since we necessarily underestimate our creativity it is desirable that we underestimate to a roughly similar extent the difficulties of the tasks we face, so as to be tricked by these two offsetting underestimates into undertaking tasks which we can, but otherwise would not dare, tackle. The principle is important enough to deserve a name: since we are apparently on the trail here of some sort of Invisible or Hidden Hand that beneficially hides difficulties from us, I propose \”The Hiding Hand.\” 

What this principle suggests is that, far from seeking out and taking up challenges, people are apt to take on and plunge into new tasks because of the erroneously presumed absence of a challenge–because the task looks easier and more manageable that it will turn out to be. As a result, the Hiding Hand can help accelerate the rate at which men engage successfully in problem-solving: they take up problems they think they can solve, find them more difficult than expected, but then, being stuck with them, attack willy-nilly the unsuspected difficulties–and sometimes even succeed. 

In the last few years, I have evolved a habit for that time in August when I head off for  vacation and other end-of-summer plans. I leave behind a series of scheduled daily posts about topics in economics, academia, and writing or editing that are usually based on historical essays and writings which caught my eye at some point. This year, I\’ll start with some thoughts about the 1885 address given by Alfred Marshall, \” The present position of economics.  An inaugural lecture given in the Senate House at Cambridge, 24 February, 1885.\”

The occasion for the lecture was that Henry Fawcett, the previous Professor of Political Economy at Cambridge University, had died, and Marshall was his successor in the position. The lecture is notable for many lovely turns of phase. As one example, it\’s the source of the comment that \”the most reckless and treacherous of all theorists is he who professes to let facts and figures speak for themselves, who keeps in the back-ground the part he has played, perhaps unconsciously, in selecting and grouping them.\”

But Marshall\’s lecture also has an oddly contemporary feel. In 1885, socialism was on the rise in England, and economics was often criticized for assuming too much rationality and being unwilling and unable to addressing real social problems. Thus, Marshall\’s lecture has several underlying currents. He wants to acknowledge that the socialists of his day are pointing to real problems, while arguing that their answers are not likely to be useful in addressing those problems. He wants to define what is at the core of the subject of economics. He wants to explain that economics is a useful mechanism for looking at social policies, but also that economics is limited in the answers it can give. He suggests that economics should be helpful where it can, and then should shut up.

Here\’s Marshall on the socialists of his time:

The perfectibility of man had indeed been asserted by Owen and other socialists. But their views were based on little historic and scientific study; and were expressed with an extravagance that moved the contempt of the business-like economists of the age. The socialists did not attempt to understand the doctrines which they attacked; and there was no difficulty in showing that they had not rightly apprehended the nature and efficiency of the existing economic organization of society. It is therefore not a matter for wonder that the economists, flushed with their victories over a set of much more solid thinkers, did not trouble themselves to examine any of the doctrines of the socialists, and least of all their speculations as to human nature.

But the socialists were men who had felt intensely, and who knew something about the hidden  springs of human action of which the economists took no account. Buried among their wild rhapsodies there were shrewd observations and pregnant suggestions from which philosophers and economists had much to learn. … Among the bad results of the narrowness of the work of English economists early in the century perhaps the most unfortunate was the opportunity which it gave to socialists to quote and misapply economic dogmas. …

Why should it be left for impetuous socialists and ignorant orators to cry aloud that none ought to be shut out by the want of material means from the opportunity of leading a life that is worthy of man? Of those who throw their whole souls into the discussion of this problem, the greater part put forth hastily conceived plans which would often increase the evils that they desire to remedy: because they have not had a training in thinking out hard and intricate problems, a training which is most rare in the world …

What is the core of economics that can offer some assistance in thinking through these hard and intricate problems? Marshall notes that when people think about the main intellectual contribution of Adam Smith, they often point to what we now refer to as the \”invisible hand\” idea–that when people act in their own self-interest–though hard work, innovation, shopping for desired goods and services–they will often benefit the social welfare. However, Marshall argues that in fact, Smith\’s key insight was something quite different: \”His work was to indicate the manner in which value measures human motive.\” In other words, Smith started the process of drawing linkages between the ways that people act and the monetary incentives they face in terms of prices and wages–which is what makes human motives into something measurable. Marshall thought this idea was the true core of economic thinking:

But it is becoming clear that the true philosophic raison d’ệtre of the [economic] theory is that it supplies a  machinery to aid us in reasoning about those motives of human action which are measurable. In the world in which we live, money as representing general purchasing power, is so much the best measure of motives that no other can compete with it. … 

When in this world we want to induce a man to do anything for us, we generally offer him money. It is true that we might appeal to his generosity or Nature in the indicative mood and her ethical laws in the imperative sense of duty; but this would be calling into action latent motives that are already in existence, rather than supplying new motives. If we have to supply a new motive we generally consider how much money will just make it worth his while to do it. Sometimes indeed the gratitude, or esteem, or honour which is held out as an inducement to the actions may appear as a new motive : particularly if it can be crystallised in some definite outward manifestation; as for instance in the right to make use of the letters C.B., or to wear a star or a garter. In this world such distinctions are comparatively rare and connected with but few transactions; and they would not serve as a measure of the ordinary motives that govern men in the acts of every day life.

Marshall emphasizes that just because economics is often focused on selfish and self-regarding behavior, in the sense of how behavior responds to monetary incentives, this is not a claim that selfish behavior is good or worthwhile. Instead, economics is a mechanism for thinking through the how these monetary incentives will affect behavior. Marshall uses the term \”organon,\” which has fallen out of use, but is defined as \”a means of reasoning or a system of logic.

But though in wording our economic organon this idea of measurability should be always present, it should not, I think, be prominent. For practical purposes, and in order to keep the better our touch of real life, it will be best to go on treating it as chiefly concerned with those motives to which a money price can be directly or indirectly assigned. But motives that are selfish or self-regarding have no claim to more consideration than others except in so far as they may be more easily measurable and may more easily have a money-price assigned to them. The organon then must have reference to an analysis of the positive motives of desire for different goods, and of the negative motives of unwillingness to undergo the fatigues and sacrifices involved in producing them.

Marshall makes the subtle but ever-useful point that when it comes to social problems and public public policy, economics has an important role to play in figuring out the direction and size of likely outcomes, and perhaps especially in pointing out that certain proposals are unlikely to have the effects that are promised. But he also emphasizes that economics doesn\’t provide answers. Instead, he argues that economics should help where it can, and then economics should shut up. In particular, economics in Marshall\’s view should not get in the way of or push out any other kinds of knowledge or common sense, and when economists given an overall opinion, they should always be clear to separate the actual economics from their own personal judgments.

In nearly every important social problem, one of these component parts has to do with those actions and sacrifices which commonly have a money price. This set of considerations is almost always one of the hardest, one of those in which untutored common sense is most likely to go wrong. But it is fortunately one of those which offer the firmest foot-hold to scientific treatment. The economic organon brings to bear the accumulated strength of much of the best genius of many generations of men. It shows how to analyse the motives at work, how to group best genius of many generations of men. them, how to trace their mutual relations. And thus by introducing systematic and organized methods of reasoning, it enables us to deal with this one side of the problem with greater force and certainty than almost any other side; although it would have probably been the most unmanageable side of all without such aid. Having done its work it retires and leaves to common sense the responsibility of the ultimate decision; not standing in the way of, or pushing out any other kind of knowledge, not hampering common sense in the use to which it is able to put any other available knowledge, nor in any way hindering; helping where it could help, and for the rest keeping silence.

Sometimes indeed the economist may give a practical decision as it were with the authority of his science, but such a decision is almost always merely negative or critical. It is to the effect that a proposed plan will not produce its desired result; just as an engineer might say with authority that a certain kind of canal lock is unsuitable for its purpose. But an economist as such cannot say which is the best course to pursue, any more than an engineer as such can decide which is the best route for the Panama canal. 

It is true that an economist, like any other citizen, may give his own judgment as to the best solution of various practical problems; just as an engineer may give his opinion as to the right method of financing the Panama canal. But in such cases the counsel bears only the authority of the individual who gives it: he does not speak with the voice of his science. And the economist has to be specially careful to make this clear; because there is much misunderstanding as to the scope of his science; and undue claims to authority on practical matters have often been put forward on its behalf.

A choice to make a good or service \”free\” to consumers has various tradeoffs. It makes the good or service easier to consume for those who could not otherwise afford it. It creates a need for higher government taxes or borrowing. Perhaps more subtle effects are that changing the nature of who pays will also tend to change the quality of the service. In the case of higher education students, if you (or your family) is paying tuition, the level of effort you give, your choice of courses, and the pressure you feel to finish a degree within a certain amount of time are all going to shift. In the case of providers of higher education, if attracting government funds is the pathway to survival, then the institutions will be inclined to follow the lead of government–rather than the desires of students–in choices about who and how many to admit, what to teach, how to staff courses, where to locate branch campuses,whether to expand into online education, what courses to offer, what counts for a passing grade and a graduation requirement, and more.

Some of these changes from switching to \”free\” higher education may be desirable, while others are less so. My point is that it would be blinkered to imagine that a switch to \”free\” higher education won\’t also lead to an array of other changes. In a similar spirit,  Jason D. Delisle and Preston Cooper offer a short essay on \”International Higher Education Rankings: Why No Country\’s WHY Higher Education System Can Be the Best\” (American Enterprise Institute, August 2019). As they note:

A government that pays for a greater share of each student’s college education can afford to send fewer of those students to college, resulting in lower overall degree attainment. Similarly, without the ability to raise revenue through tuition, colleges may have fewer resources to spend on each student’s education.

The theme of their exercise is to use OECD data on high-income countries to point out some tradeoffs between higher education attainment, total resources, and public subsidies. This seems to me like a useful start in thinking about the many tradeoffs that would be involved in \”free\” higher education.

A couple of weeks ago, US Treasury Secretary Steven Mnuchin announced his finding that China was manipulating its currency to keep it unfairly low, and further announced that he would be taking the issue up with the International Monetary Fund. I offered some of my own views on this announcement when it happened. But what\’s interesting here is not what I think, or even what Mnuchin thinks, but what the IMF thinks.

Fortuitously, the IMF just published its 2019 External Sector Report: The Dynamics of External Adjustment (July 2019). As the title implies, it\’s about trade surpluses and deficits all over the world, not just the US and China. But it has some content that gives a sense of how it is likely to respond to Mnuchin\’s importuning.  Here\’s an overall comment:

The IMF’s multilateral approach suggests that about 35–45 percent of overall current account surpluses and deficits were deemed excessive in 2018. Higher-than-warranted balances remained centered in the euro area as a whole (driven by Germany and the Netherlands) and in other advanced economies (Korea, Singapore), while lower-than-warranted balances remained concentrated in the United Kingdom, the United States, and some emerging market economies (Argentina, Indonesia). China’s external position was assessed to be in line with fundamentals and desirable policies, as its current account surplus narrowed further … 

A couple of points are worth noting here. First, the IMF does not believe that all trade deficits and surpluses are \”excessive,\” only that about 35-45% are \”excessive.\” For economists, there will be sensible reasons why some countries make net investment in other countries, or receive net investments from other countries, which means that some countries will have reasonable trade surpluses or deficits.

Second, the IMF is saying that the the excessive trade surpluses are centered in teh EU and in Korea and Singapore. The excessive and trade deficits are the United States, the UK, and some emerging markets. But China\’s trade picture is not \”excessive.\” Instead, it\’s in line with economic fundamentals.

Here\’s the IMF list of countries with the biggest trade deficits and surpluses in 2018, as shown the table adapted from the IMF report. The US has by far the biggest trade deficit in absolute terms, although relative to the size of the US economy it\’s similar or even smaller than many of the other countries with big trade deficits. Among countries with trade surpluses, China ranked 11th in absolute size in 2018, and as a share of China\’s giant GDP, it\’s trade surplus was by far the smallest of the top 15.

But what about China\’s exchange rate in particular? Here\’s a figure from the IMF showing China\’s exchange rate since 2007, along with China\’s trade surpluses over that time. China\’s exchange rate has appreciated 36% since 2007, and its trade surpluses have been falling. In effect, Mnuchin\’s complaint is about the slight upward bend at the far right-hand side of China\’s exchange rate line.

So what is the cause for the large US trade deficits? The IMF points to a standard economic phenomenon that back in the 1980s used to be called the \”twin deficits\” problem. The US is running very large budget deficits, at a time when its unemployment rate has been 4% or less for more than year. From a macroeconomic view, all that buying power has to go someplace, and with the US economy already near full employment, it ends up flowing by various indirect routes into buying more imports–and driving up the US trade deficit. As the IMF writes, \”many countries with lower-than-warranted current account balances had a looser-than-desirable fiscal policy, compared to its medium-term desirable level (Argentina, South Africa, Spain, United Kingdom, United States) …\”

Why has China\’s current account surplus faded? One reason is related to the appreciation of China\’s exchange rate, already described. In addition, the IMF report suggests that China may be experiencing \”export market saturation,\” given that Chinas\’ share of world exports more than tripled from 5% in 2001 to 16% by 2017. China has also had a modest decline in its still-high savings rate, which means higher consumption of all goods, including a greater willingness to import.

The US has legitimate trade issues with China. China\’s treatment of intellectual property has often been cavalier at best, criminal at worst. But when it comes to the overall US trade deficit problem, the it seems quite unlikely that the IMF will designate China as the culprit.

Jurisdictions around the world have been implementing taxes on sugar-sweetened beverages. Here\’s a map. 

Hunt Allcott, Benjamin B. Lockwood, and Dmitry Taubinsky focus on studies of the eight US jurisdictions  that have adopted such a tax, along with the broader literature on causes and costs of obesity, in \”Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence\” in the just-released Summer 2019  Journal of Economic Perspectives. (Full disclosure: I\’m the managing editor of JEP, and thus predisposed to believe that the articles are of high quality and widespread interest.) Here\’s their table of the US jurisdictions that have imposed a tax on sugar-sweetened beverages. 

Making the case for (or against) a tax on sugar-sweetened beverage requires addressing a number of questions. 

• Why focus on sugar-sweetened beverages rather than on other sources of calories, or on candy and junk food?
• How much does consumption of sugar-sweetened beverages lead to heath or other harms like tooth decay?
• How much does is tax on sugar-sweetened beverages passed through from retailers to consumers?
• How much does a tax on sugar-sweetened beverages lead to people just shopping in a nearby jurisdiction where they aren\’t taxed?
• How much does the share of tax on sugar-sweetened beverages that is passed through to consumers affect the health harms–in particular for those consumers most at risk (like children who consume a high volume of such drinks)–especially after tak
• To what extent should the harms from sugar-sweetened beverages be counted as \”externalities,\” which are costs imposed upon others, and to what extent are the \”internalities,\” a term which refers to costs that the consumers of these products were (perhaps because of imperfect information or lack of self-control) not taking into account that they were imposing on themselves?
• How much money might a tax on sugar-sweetened beverages collect?
• To what extent do the costs of such a tax, and also the health benefits of such a tax, fall more heavily on those with lower income levels?
• Putting all these factors together, does a tax on sugar-sweetened beverages seem like a wise policy?

This may seem like a lot of complications for answering a question about a small-scale policy. But for those who want a serious and actual answer , these kinds of questions can\’t be avoided. I won\’t try to summarize all the points of the paper, but the tone of answers can be inferred from the bottom line: 

[W]e estimate that the socially optimal sugar-sweetened beverage tax is between 1 and 2.1 cents per ounce. One can understand this as coming from the correction needed to offset the negative externality (about 0.8 cents per ounce) and internality (about 1 cent per ounce … Together, these rough estimates suggest an optimal tax of about 1.5 cents per ounce. While there is considerable uncertainty in these optimal tax estimates, the optimal tax is not zero and may be higher than the levels in most US cities to date. However, for policymakers who are philosophically opposed to considering internalities in an optimal tax calculation, the optimal tax considering only externalities is around 0.4 cents per ounce. …

[W]e estimate that the social welfare benefits from implementing the optimal tax nationwide (relative to having zero tax) are between $2.4 billion and $6.8 billion
per year. These gains would be substantially larger if the tax rate were to scale with
sugar content. Of course, such calculations require strong assumptions and depend on uncertain empirical estimates …  Furthermore, sugar-sweetened beverage taxes are not a panacea—they will not, by themselves, solve the obesity epidemic in America or elsewhere. But sin taxes have proven to be a feasible and effective policy instrument in other domains, and the evidence suggests that the benefits of sugar-sweetened beverage taxes likely exceed the costs.

The United States, like most places, an ambivalent view of big business. When big firms are making high profits, we are concerned that they are out-of-control and exploitative. If big firms are is performing poorly, with losses and layoffs, we argue over how or whether to rescue them. (Remember the auto company bailouts in 2009?) Might it be possible to strike a more lasting balance?

For example, here\’s one possible combination of policies. Corporate bigness is fine by itself, and will not be prosecuted. However, the biggest firms will be sharply limited in their ability to acquire other companies. In addition, they may face limitations on their ability to participate in politics, as well as compulsory licensing of their key patents. In one famous case in 1956, the Bell System was required by antitrust authorities to license all of its existing patents to all US firms for free.

Something like this policy mix was implemented in the US economy in the middle decades of the 20th century. Naomi Lamoreaux writes about \”The Problem of Bigness: From Standard Oil to Google,\” in the Summer 2019 issue of the Journal of Economic Perspectives. She points out that many of the concerns about Standard Oil more than century ago, and about Google and other big tech companies in the present, are not about higher prices being changed to consumers. Instead, the concerns were about tactics used to choke potential competitors and about the political clout of bigness. Lamoreaux describes the pendulum swings of law and public opinion with regard to bigness, but here, I want to focus on the political balance that was struck with regard to bigness in the middle decades of the 20th century.

Lamoreaux points out that the large US firms that became well-established in the second and third decades of the 20th century remained successful for some time, but with no particular social trend toward greater concentration of industry. This is also a time when public attitudes toward corporate bigness were not very harsh. She writes:

Tracking the 100 largest firms in the US economy at various points between 1909 and 1958, Collins and Preston (1961) similarly found that the top firms gradually came to enjoy “an increasing amount of entrenchment of position by virtue of their size” (p. 1001). Over these same decades, moreover, there was remarkably little change in overall levels of economic concentration. Scholars have measured concentration in different ways and over different sets of years, and as a result, their estimates diverge somewhat. But … there was no clear trend toward increasing (or decreasing) concentration, either in the manufacturing sector or in the economy as a whole.

Intriguingly, even as large firms consolidated their positions, the public’s view of them became increasingly accepting. Galambos (1975) analyzed references to big business in a sample of periodicals read by various segments of the middle class over the period 1890–1940 and found that the antipathy of the late nineteenth century had greatly diminished by the interwar period. Auer and Petit (2018) conducted a similar analysis, searching the Proquest database of historical newspapers to find articles that included the word “monopoly.” Even though Auer and Petit were selecting on a word with generally negative connotations in American culture, they found that unfavorable mentions dropped from about 75 percent of the total in the late nineteenth century to a little over 50 percent starting in the 1920s.

After World War I, large firms had stepped up both their investments in research and development and their efforts to accumulate patent portfolios. According to surveys conducted by the National Research Council, the number of new industrial research labs grew from about 37 per year between 1909 and 1918 to 74 per year between 1929 and 1936, and research employment in these labs increased by a factor of almost ten between 1921 and 1940 (Mowery and Rosenberg 1989, pp. 62–69). Large firms generated increasing numbers of patents internally, but they also bought them from outside inventors. …  The competitive advantages to large firms that broad portfolios of patents could bring, in terms of both what they could achieve technologically and how they could forestall competition, were becoming increasingly apparent—not least to the firms themselves (Reich 1985). As early as the 1920s, valuations on the securities markets began to mirror the size and quality of large firms’ patent portfolios (Nicholas 2007). 

Federal antitrust authorities began to pay attention as well, especially during the late 1930s … In 1938, a specially created commission, the Temporary National Economic Committee, launched a three-year  investigation into the “Concentration of Economic Power.” The Temporary National Economic Committee began its hearings by examining large firms’ use of patents to achieve monopoly control, focusing in particular on the automobile and glass industries. In 1939, the committee held a second set of hearings to solicit ideas about how the patent system could be reformed (Hintz 2017). It also commissioned a book-length study by economist Walton Hamilton, Patents and Free Enterprise (Hamilton 1941). According to Hamilton, large firms had perverted the patent system. The system’s original purpose had been to encourage technological ingenuity, but now large firms were instead deploying patents as barriers to entry and using licensing agreements to divide up the market and limit competition among themselves (Hamilton 1941, pp. 158–63; John 2018).

The Temporary National Economic Committee’s patent investigation was headed by Thurman Arnold, assistant attorney general in charge of the Department of Justice’s antitrust division. Arnold’s views about the abuse of patents were similar to Hamilton’s, and at his insistence, the committee’s final report recommended compulsory licensing—requiring firms to license their technology at a fair royalty to anyone who wanted to use it. The recommendation went nowhere in Congress (Waller 2004), but Arnold nonetheless pursued it at Justice. As early as 1938, for example, he pushed Alcoa to license a set of its patents as part of an antitrust settlement, and the company agreed in a consent decree entered in 1942. By that time, Arnold had already secured three other compulsory licensing orders, and many more were to follow. Barnett (2018) compiled a complete list of such orders and their terms from 1938 to 1975. By the latter year, the total had risen to 136, one-third of which did not permit the firms to recoup any royalties at all for their intellectual property.

In the early and mid-twentieth century, concerns about excessive concentration of economic and political power in the hands of dominant firms helped constrain the ability of large firms to grow through mergers and acquisitions. During this period, if large firms wanted to grow, they often had little choice but to invest in internal R&D.

Antitrust policy not only encouraged large firms to invest in internal R&D, but also occasionally promoted technology diffusion. A leading example is the 1956 consent decree against the Bell System, one of the most significant antitrust rulings in U.S. history (Watzinger et al., 2017). The decree forced Bell to license all its existing patents royalty-free to all American firms. Thus, in 1956, 7,820 patents  (or 1.3% of all unexpired U.S. patents) became freely available. Most of these patents covered technologies that had been developed by Bell Labs, the research subsidiary of the Bell System.

Compulsory licensing substantially increased follow-on innovation building on Bell patents. Using patent citations, Watzinger et al. (2017) estimate an average increase in follow-on innovation of 14 percent. This effect was highly heterogeneous. In the telecommunications sector, where Bell kept using exclusionary practices, there was no significant increase. However, outside of the telecommunications sector, follow-on innovation blossomed (a 21% increase). The increase in follow-on innovation was driven by young and small companies, and more than compensated Bell\’s reduced incentives to innovate. In an in-depth case study, Watzinger et al. demonstrate that the decree accelerated the diffusion of the transistor technology, one of the most important technologies of the twentieth century.

This view that the consent decree was decisive for U.S. post-World War II innovation, particularly by spurring the creation of whole industries, is shared by many observers. As Gordon Moore, the cofounder of Intel, notes: \”[o]ne of the most important developments for the commercial semiconductor industry (…) was the antitrust suit led against [the Bell System] in 1949 (…) which allowed the merchant semiconductor industry \\to really get started\” in the United States (…) [T]here is a direct connection between the liberal licensing policies of Bell Labs and people such as Gordon Teal leaving Bell Labs to start Texas Instruments and William Shockley doing the same thing to start, with the support of Beckman Instruments, Shockley Semiconductor in Palo Alto. This (…) started the growth of Silicon Valley\” (Wessner (2001, p.86) as quoted in Watzinger et al. (2017)).

Scholars such as Peter Grindley and David Teece concur: \”[AT&T\’s licensing policy shaped by antitrust policy] remains one of the most unheralded contributions to economic development possibly far exceeding the Marshall plan in terms of wealth generation it established abroad and in the United States\” (Grindley and Teece (1997) as quoted in Watzinger et al. (2017)).

Uwe Reinhardt had the remarkable skill that even when he was discussing a subject where you felt that you already knew a lot, he offered the kinds of live-wire facts and metaphors, insights and opinions, which informed and challenged–and often entertained as well. Reinhardt died in November 2017. His final book has just been published: Priced Out: The Economic and Ethical Costs of American Health Care. For a flavor of the book and Reinhardt\’s style, the Milken Institute Review has published an excerpt from the book in the its Third Quarter 2019 issue.

There\’s a long-standing controversy over whether those who donate a kidney should be able to be paid for doing so. Whatever one\’s view of whether the seller of a kidney should get a positive price for doing so, it\’s worth considering that under traditional rules, the donor of a kidney in efect receives a negative price for doing so. That is, the donor of a kidney faces a variety of costs–both explicit (travel, hotel) and implicit (time off from work, physical discomfort). Even many those who feel that a kidney donors should not be paid for the act of donating itself seem willing to consider the possibility that donors should be reimbursed for expenses.

The Trump administration just signed an executive order which would expand the ability of the National Living Donor Assistance Center to compensate kidney donors for expenses: not just reimbursing them for travel expenses, but also for lost wages, child care, and other expenses.

How much difference would such a policy of expanding compensation for expenses make? Somewhat coincidentally, Frank McCormick, Philip J. Held, Glenn M. Chertow, Thomas G. Peters and John P. Roberts were just in the process of publishing \”Removing Disincentives to Kidney Donation: A Quantitative Analysis,\” which appeared in the Journal of the American Society of Nephrology (July 2019, pp. 1349-1357). Here\’s their list of seven disincentives to donate a kidney, with an estimated monetary cost for each:

They readily admit that there is a high range of uncertainty around these kinds of estimates. Given that caveat, they argue:

We show that the total monetary value of the seven disincentives facing a typical living kidney donor is about $38,000. Removing all disincentives would increase kidney donations by roughly 12,500 per year, which would cut the adult waiting list for transplant kidneys in half in about 4 years. This would require an initial government  outlay of only about $0.5 billion per year, but would ultimately result in net taxpayer savings of about $1.3 billion per year. The value to society of the government removing the disincentives would be about $14 billion per year, reflecting the great value of the additional donated kidneys to recipients and the savings from these recipients no longer needing expensive dialysis therapy.

One of those things that \”everyone knows\” is that continued technological progress is vital to the continued success of the US economy, not just in terms of GDP growth (although that matters) but also for major social issues like providing quality health care and education in a cost-effective manner, addressing environmental dangers including climate change, and in other ways. Another thing that \”everyone knows\” is that research and development spending is an important part of generating new technology. But total US spending on R&D as a share of GDP has been nearly flat for decades, and government spending on R&D as a share of GDP has declined over time.

Here\’s a figure on funding sources for US R&D from the Science and Engineering Indicators 2018.  The top line shows the rise in R&D spending in the 1960s (much of it associated with the space program and the military), a fall in the 1970s, and then how R&D spending has bobbed around 2.5%  of GDP since then. The dark blue line shows the rise in business-funded R&D, while the light blue line shows the fall in government funding for R&D.

One underlying issue is that business-funded R&D is more likely to be focused on, well, the reasonably short-term needs of the business, while government R&D can take a broader and longer-term perspective,

One signal of this dynamic is that the share of patents which rely on government government funding is on the rise. L. Fleming, H. Greene, G. Li, M. Marx, and D. Yao describe the pattern in \”Research Funding: Government-funded research increasingly fuels innovation\” (Science, June 21, 2019, pp. 11139-1141).

The OECD (2018) reports that 33 of the 42 countries it examined provide some material level of tax generosity toward research and development. The US federal T&D tax credit is in the bottom one- third of OECD nations in terms of generosity, reducing the cost of US R&D spending by about 5 percent. …  In countries with the most generous provisions, such as France, Portugal, and Chile, the corresponding tax incentives reduce the cost of R&D by more than 30 percent. Do research and development tax credits actually work to raise R&D spending? The answer seems to be “yes.”