Stories of Progress and Stagnation

I grew up around computers and have always taken it for granted that we lived in a time of enormous innovation and growth. Within my lifetime, my family has gone from something that looks like this:

To all individually having iPhones, which are enormously more powerful machines, connected to the Internet, and robust platforms for a huge variety of independently developed software. Never mind our various laptops and desktop computers!

It seems to me that from around the point that the term “web 2.0” was coined to the market crash of 2008, the story about the state of things that most people accepted was the one I was inclined to accept by default; that we lived in an era of accelerating progress. That every year would see huge leaps over the previous year, and the year after that would see a leap of similar relative magnitude, and this would go on indefinitely.

There have always been stagnationists, but it’s only in the last couple of years that stagnation stories have started to become fashionable again. Tyler Cowen deserves no small amount of credit, as The Great Stagnation made an enormous splash when it came out in January of last year. While discussions of the recession up until then had been made up almost entirely of diagnosing the financial bubble, post-TGS discussions had to face the possibility that our present predicament might be part of larger, more structural trends. Regardless of whether the book changed anyone’s minds directly, there can be little doubt that it played a huge role in setting the agenda.

The debate that has emerged has fascinated me, both as someone who is deeply interested in our propensity to tell stories, and simply because it is extremely hard to determine who is correct.

The Death of Ambition and the Modern Game of Inches

Tyler Cowen credits PayPal founder and venture capitalist Peter Thiel with inspiring the story behind The Great Stagnation. Recently, Thiel debated Google Chairman Eric Schmidt on the subject of technology and progress. One section of that debate that made the rounds in the economics blogosphere concerned Google’s $50 billion in the bank.

Thiel argued that “if we’re living in an accelerating technological world”, Google should be able to invest that $50 billion in technology in a way that returns their investment many times over. Even if Googlers are claiming that we live in an era of progress, their actions speak to a more pessimistic assessment.

Thiel believes that we live in a deterministic world in which progress is made by making big bets on enormous projects. Part of the reason we no longer pursue some ambitions is that we have all become indeterminists; our resources are all tied up in hedging against uncertainty. Even though the tech sector is characterized by progress so stable and relentless that we refer to several specific trends as “laws”, the players are, if anything, more indeterminist in their worldview than average.

Google’s low-yielding $50 billion is the ultimate symbol of this. Google made nearly $10 billion in profits in 2011, and almost all of that came from search, their core product. Thiel’s argument is that if Google believed that we lived in a time of accelerating technological progress, where $10 billion a year breakthroughs were just lying around waiting to be invented, they would be spending every penny they had on attempting to make those breakthroughs happen.

More important than the cultural change, however, is the fact that public policy has systematically outlawed ambitious projects of any sort. From the debate with Schmidt:

The why questions always get immediately ideological. I’m Libertarian, I think it’s because the government has outlawed technology. We’re not allowed to develop new drugs with the FDA charging $1.3 billion per new drug. You’re not allowed to fly supersonic jets, because they’re too noisy. You’re not allowed to build nuclear power plants, say nothing of fusion, or thorium, or any of these other new technologies that might really work.

So, I think we’ve basically outlawed everything having to do with the world of stuff, and the only thing you’re allowed to do is in the world of bits. And that’s why we’ve had a lot of progress in computers and finance. Those were the two areas where there was enormous innovation in the last 40 years. It looks like finance is in the process of getting outlawed. So, the only thing left at this point will be computers and if you’re a computer that’s good. And that’s the perspective Google takes.

Further down, responding to criticism of the financial sector, he adds:

I disagree with the premise behind the question that there’s some sort of tradeoff between finance and other areas of innovation. I think it’s easy to be anti-finance at this point in our society, and I think the reality is we have an economy that got very lopsided towards finance, but it’s fundamentally because people weren’t able to do other things.

So, if you ask why did all the rocket scientists go to work on Wall Street in the ’90s to create new financial products, and you say well they were paid too much in finance and we have to beat up on the finance industry, that seems like that’s the wrong side to focus on. I think the answer was, no, they couldn’t get jobs as rocket scientists anymore because you weren’t able to build rockets, or supersonic airplanes, or anything like that. And so you have to ‑‑ it’s like why did brilliant people in the Soviet Union become grand master chess players? It’s not that there’s something deeply wrong with chess, it’s they weren’t allowed to do anything else.

In short, we have grown risk averse in both our culture and in our policy.

Science fiction writer Neal Stephenson is firmly in the stagnationist camp, and he definitely believes it is all about risk aversion. He has written:

 Innovation can’t happen without accepting the risk that it might fail. The vast and radical innovations of the mid-20th century took place in a world that, in retrospect, looks insanely dangerous and unstable. Possible outcomes that the modern mind identifies as serious risks might not have been taken seriously — supposing they were noticed at all — by people habituated to the Depression, the World Wars, and the Cold War, in times when seat belts, antibiotics, and many vaccines did not exist.

In Stephenson and Thiel’s story, true innovation is risky, bold, and visible, while what passes for innovation in modern times is peanuts by comparison. Stephenson pointed to the ongoing competition to build the world’s tallest building as an emblematic example of the problem. These days the tallest building in the world is only a few inches taller than the previous record-holder, and only holds the record for a few months as another slightly taller building is always being constructed in near parallel.

What Stephenson wants is for us to build a structure several orders of magnitude larger than anything that’s ever been built before; a structure that will hold the record for decades before it becomes technologically possible or financially conceivable to surpass it. To Stephenson as well as Thiel, that is what innovation should look like.

The stagnationist has no problem with the ground game, but is frustrated that there doesn’t seem to have been any passing game in forty years. Meanwhile everyone is going around presenting the incremental gains as though they were big breakthroughs. Neither Stephenson, Thiel, nor indeed Cowen, are impressed. You talk about all the wonders we’ve seen since the mass adoption of the Internet, but have they really moved the needle? Just think about penicillin, anesthetics, the automobile and the airplane, not to mention all the spillover innovations that came from putting a man on the moon!

At Founder’s Fund, the venture capital firm at which Thiel is a partner, they have a saying: “we wanted flying cars, and instead we got 140 characters.”

The Value of the Unseen

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

-Frederic Bastiat, What Is Seen and What Is Not Seen

I see a lot of truth in pieces of the arguments made by Thiel, Stephenson, and Cowen, but am uncertain whether I buy into all of it. My natural inclination has always been to dismiss stagnationist stories, and Stephenson’s fixation with big, visible things made me all the more skeptical. The stories I have grown close to over the years frequently point out how what seems to be plain truth is often, when you take a step back, a lot less clear and sometimes completely wrong. You think, for instance, that making something as simple as a pencil is the easiest possible task, but it turns out that there’s this huge process behind it in which no individual has enough knowledge to assemble a single pencil.

Take GDP as an example. It’s a nice point of reference, but if you start assuming that GDP–or even GDP per capita–is synonymous with national wealth, you run into some serious problems. GDP is essentially just aggregate spending. When you buy an iPhone for $199.99, you are adding $199.99 to this year’s GDP. It’s a great proxy for national income but it has many recognized problems. In what is perhaps a dated and vaguely sexist sounding example, Paul Samuelson came up with the following scenario:

Take Samuelson’s example of the man marrying his maid. Samuelson’s point is that the new bride continues doing the housework without being paid. But that would not mean that the work suddenly had no market value. So, in this case, GDP actually understates the market value of all final goods and services because this particular service is no longer exchanged on the market.

The valued activity–the housework–is still being done, but because there isn’t any spending involved, it isn’t measured in GDP.

Bryan Caplan has pointed out repeatedly that the consumption done on digital devices and on the Internet is hugely mismeasured by metrics like GDP. In one post, he points out one implication of all the various network products seeing success in the market today:

In the real world, network goods visibly improve all the time. But suppose they didn’t. Suppose the Facebook of today used the same source code as it did five years ago, but still attracted new users at the same rate as it did in the real world. Many economists would be tempted to call this “stagnation,” but they’d be wrong. Even if Facebook’s source code stayed the same, the mere fact that more people are using the product causes it to be better. Why? Because the point of the product is to amusingly interact with your friends. The more friends who use it, the more amusing it is.

The upshot: Economists (and people generally) underestimate true economic growth for all expanding network products. When you measure the quality of network products, you can’t simply look at them in isolation. You have to measure what you can do with them.

There are many dimensions in which Caplan argues that our measurement biases are worse than ever, but our standard of living is actually better than ever.

Looking at my own daily life, a huge amount of my consumption is simply not counted in GDP. I consume an enormous amount of content without paying anything for it. There’s also the reverse benefit–I can write lengthy posts like this one and put them in a public place, whereas before the Internet only the lucky few who managed to get published could do anything roughly equivalent.

If we are a groupish species, and I believe we are, then the ability to connect with others and increase the number of our shared experiences is a huge benefit. Clay Shirky’s excellent book, Here Comes Everybody, discusses how modern technology has reduced the transaction costs associated with group action, the benefits of which we are only beginning to understand. In his followup, Cognitive Surplus, he described how central hubs like Wikipedia are able to aggregate a few minutes of effort from enough sources to result in one enormously valuable resource.

Even after The Great Stagnation, many defend the story that progress is accelerating. In Race Against the Machine, Erik Brynjolfsson and Andrew McAfee argue that technological innovation has been going at a breakneck pace for decades, and we’re only now entering the second half of the chessboard. Yet their vision of progress has a caveat–we are currently at a moment where technology is replacing humans in performing certain tasks faster than entrepreneurs are coming up with new jobs that humans are better at than machines. Arnold Kling said it best:

 The paradox is this. A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

Still, overall well-being is going way up as machines become much, much more efficient at providing us with things that we value for rock bottom prices. So on net, we’re seeing tremendous progress.

Radical Uncertainty

Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.

-Nassim Nicholas Taleb, The Black Swan

If our culture has embraced indeterminacy, or more accurately uncertainty, as Thiel thinks we have, then Taleb has taken this story farther than anyone. Whereas Thiel will argue:

 Several people have successfully started multiple companies that became worth more than a billion dollars. Steve Jobs did Next Computer, Pixar, and arguably both the original Apple Computer as well as the modern Apple. Jack Dorsey founded Twitter and Square. Elon Musk did PayPal, Tesla, SpaceX, and SolarCity. The counter-narrative is that these examples are just examples of one big success; the apparently distinct successes are all just linked together. But it seems very odd to argue that Jobs, Dorsey, or Musk just got lucky.

Taleb has no compunction with arguing that they got lucky–or, at the very least, that we are incapable of determining the difference between pure luck and its opposite. In Fooled By Randomness, he conjures up a scenario in which an eccentric rich person will pay $10 million to whomever wins a game of Russian Roulette. Someone might get lucky and win, but if they keep playing, the odds will eventually catch up with them. However, if the pool of players is large enough, you will get a handful of consistent winners even after many rounds of playing the game.

In addition, in time, if the roulette-betting fool keeps playing the game, the bad histories will tend to catch up with him. Thus, if a twenty-five-year-old played Russian roulette, say, once a year, there would be a very slim chance of his surviving until his fiftieth birthday–but, if there are enough players, say thousands of twenty-five-year-old players, we can expect to see a handful of (extremely rich) survivors (and a very large cemetery).

What you always miss out on when citing examples of people like Steve Jobs whose success seems so improbable at the individual level is that, with a big enough “cemetery” of people making similar attempts but failing, the probability of having a few people like him increases. Moreover, after the first success there is some preferential attachment, so to speak–while most startups that get funding do not succeed, the vast majority of startups don’t get any funding. Jack Dorsey’s first success increased the odds that even a stupid sounding idea would get funding the next time around, which increased his odds of succeeding. Now, there are a lot of people in a similar situation who did not then go on to have another success, but again, if the cemetery is big enough, you will end up with a few Jack Dorseys.

Again, the point is not to argue that everything is pure luck. The point is that the role that randomness plays in anything is unknowable. We have stories that persuade us to a greater or lesser extent, but in the end there is enormous uncertainty. Take the very debate over whether we are in a stagnation or a period of accelerating progress. The debate is very robust; with a great deal of evidence brought to bear on both sides of the argument. And everyone can think of alternative stories to fit the data–when I brought up Thiel’s conclusions about Google’s large cash horde, people immediately came up with alternative interpretations.

In Taleb’s world, progress and ill fortune are not smooth trendlines in either direction; they are lumpy. You get big, sudden breakthroughs, and huge, unexpected catastrophes (think of the turkey). So it can seem for a very long time like we’re going in either direction, and then one dramatic event today can have more of an impact on our well being than the past thirty years combined. In a way, the relatively short period since the onset of the Industrial Revolution is a big, dramatic event in the timescale of human history, and there is no guarantee that it will last. The progress could stop tomorrow, or the gains could be completely reversed by some countervailing dramatic event–say, nuclear war or a particularly virulent disease. Or, conversely, we could be at the foothill of a positive breakthrough of such a magnitude as to make the past 200 years look like nothing. There is simply no way to say.

F. A. Hayek was also a proponent of radical uncertainty; he believed that the only possible path to progress was through rote trial and error. It is possible to do the big things that the stagnationists want to see, but you’d better be prepared to see some colossal failures along the way. This begins to look more like Stephenson’s story about the role of risk, and there is certainly some overlap here.

But Thiel’s deterministic worldview is well outside of that overlap. Contra Thiel, the economist Frank Knight believed that the world is filled with irreducible and unquantifiable uncertainty. What’s more, Knight believed that progress was made and profit was found by entrepreneurs who deliberately sought out niches that had high degrees of uncertainty.

In this story of uncertainty and lumpy progress, Google’s $50 billion makes a lot of success. In a direct response to Thiel, Arnold Kling pointed out that under high uncertainty there is a high option value to waiting to invest.

Picture two possible scenarios–one in which Google develops the next big breakthrough in-house, another in which someone else develops it and Google acquires them. Google is clearly pursuing a lot of the former–famously, they are developing wearable computing and they have already clocked hundreds of thousands of miles on their fleet of automated cars. But their tens of billions of dollars in the bank suggests that they believe the big breakthroughs are going to come from outside of Google, rather than through their internal process.

This is frustrating to a hard determinist like Thiel who thinks we should be able to see what’s coming down the road and simply invest that $50 billion in it. But ultimately this is no different than any other make or buy decision that firms face; and how that split is made is a question that economists have analyzed since Coase. The fact that Google is sitting on so much money, from the perspective of this particular story, does not imply that they think we’re in the middle of a stagnation. Rather, it implies that they believe the market is more likely to supply the next $10 billion a year breakthrough than their own internal processes. That could speak to the weakness of their internal processes, or it could simply mean that the market is that much better at developing big breakthroughs than a single corporation could ever be.

Alex Tabarrok asked who will make the future if Google is just waiting for it. The answer provided by this story is that many players, in many firms, scattered across the market and across time will make the future, and many will do so in the hopes of a big payday from Google.

Cycles of Control and Resistance

This is the last story that I will examine here, and it comes from my former classmate Eli Dourado.

To really understand Eli’s story, you have to understand his larger framework. Despite the fact that economically-saavy libertarians believe very strongly in the power of incentives, most still seem to harbor the notion that the practical path forward for policy reform is through persuasion. And there is a story to be told in which this strategy has seen some success, with the neoliberal revolution for example.

In Eli’s framework, the incentives against governments adopting libertarian policies in a broad way are simply too powerful to overcome in the long run. Think about the big spam botnets. Botnets build up over time and become a low cost way to send people spam emails. After a while, one or two botnets will account for the vast majority of all spam. Security groups will get together and work to get one of the top ones taken out, and it will result in a big short term payoff–a recent takedown resulted in an estimated 50% drop in spam.

But the cost of building up a botnet is low enough, and the payoff for spam with an infinitesimal success rate is so high, that it doesn’t take long before the volume of spam is right back to where it was before the takedown. In Eli’s world, most good policies are like botnet takedowns–short term gains but a wash in the long run.

With that in mind, here’s is Eli’s more specific story about innovation:

First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Eli explicitly splits the difference between The Great Stagnation and Race Against the Machine. He posits that the Industrial Revolution was all about the technologies of control–people clustered into dense urban populations, and were employed in mass numbers by factories that produced on a scale that was unprecedented in human history. We saw massive improvements in the standard of living of industrializing nations in the blink of an eye.

But all the concentation and the mobility-reducing high capital costs made the sources of our new wealth easy targets for governments to come in and take a bigger and bigger cut. Beyond straight taxation, interest group pressures also created an incentive to exercise specific forms of control through government regulation, reducing the effectiveness of the technologies of control.

Still, the productive capacity of these technologies was such that we coasted all the way into the 1970′s before the deadweight of government regulation and taxation slowed us down. Since then, our resources have shifted to developing technologies of resistance, which is why Brynjolfsson and McAfee see accelerating innovation. It is accelerating, but it’s accelerating in a very specific area because of how difficult it is to control that particular area.

We do see welfare gains from innovation in the technologies of resistance, but they are not nearly as big as we could get with the technologies of control, were they not so bogged down with regulation. Resources are spent on creating robustness against control that would have otherwise been spent on maximizing pure economic growth, in the absence of efficiency-reducing regulation.

In this story, ideology, persuasion, and democracy will not help us. Every time the median voter swings more libertarian, we see the technologies of control begin to give us bigger gains again. But, like the botnet takedowns, it is only a matter of time before the regulations creep back in again. And we almost never see anything comparable to a botnet takedown in terms of orders of magnitudes–we see some small reforms that may be bigger or smaller in impact, but we’re talking 1% or 2% improvements, not 50% or 75%.

The only way to move to a better long run path is to change something fundamentally structural. Eli imagines an extreme version of such a change in his post on the utopia of infinite elasticity.

It’s tempting to think that the bond market is powerful because of corruption, but that is at most a proximate source of power. The real source of power is elasticity. The supply of financial capital is highly elastic; it moves around the globe in milliseconds. Try to tax it and the incidence of the tax will go elsewhere; burden it with regulations and it will flea to a more hospitable climate.

Imagine a world in which all factors of production were as mobile and elastic as financial capital. If labor and physical capital could flea instantaneously and at low cost from bad policies, there would be little danger from either the predatory or incompetent state. In short, it would be a libertarian utopia.

As with any ideal, Eli does not believe that such a world is possible to get to, but he does think that we can move closer to it. Maybe, rather than simply developing specific technologies of resistance, we can build a whole infrastructure of resistance. Maybe mass adoption of 3D printing and wireless mesh networks helps move us to a much more elastic world.

Otherwise, we will just be stuck in this race against coercion where we eek out progress in inches rather than big leaps. We may occasionally widen the gap, or set back coercion with the reform movement of the moment, but we’ll never see the enormous gains of the early Industrial Revolution on a regular basis again. In this story, you can take everything that Cato, the Hoover Foundation, and even Milton Friedman accomplished, and throw them in the garbage, and you won’t see much of a difference in the long run.

Instead of investing in lobbying, we should be investing in an infrastructure of resistance.

I have to admit that I find this to be the most fascinating story of all.

  • RobinHanson

    You write well Adam, but in the end I’m not persuaded. You push me toward accepting Cowen et al’s position, at least for rich nations for now.

    • AdamGurri

      Thanks! Honestly Eli’s basically persuaded me to his way of thinking, which I think is a version of the stagnation story and lines up with the “they’ve outlawed doing nearly everything” piece of that argument.

      • Shaun Daley

        Regulatory resistance is an easy one to trumpet. Patent law is an anti-innovation ass too.

        But regulation isn’t holding back anything really fundamental. Regulatory exceptions are made every day for prototypes & proofs of concept – from the AutoNOMOS cars licensed to drive around Berlin, to private space flight, to the various convoys of highway “truck trains”, to the UK government’s changing EU aerospace laws for the Skylon spaceplane, to the permission for exploratory & testing fracking wells, to deploying experimental wave power generators, to building electric drivechain carbon fibre cars.

        If you ask, you can easily get a regulatory exception for a proof of concept – and probably some government funding too. If you have a decent proof of concept, it is generally easy to have regulations changed – even the strongest lobbies are defeated by good products, as the Terrafugia Transition demonstrates.

        Now certainly, we would be making faster progress if there was more funding for mathematics, natural science, materials engineering and various niches like superconductor research, battery research, energy generation research, etc. We would make faster progress if educational attainment could be raised, and if intelligent people could be brought to spending more of their time on important problems.

        We would make faster progress if scientific research output could be more rapidly and widely disseminated – and better communicated. And certainly, we will make ever faster progress as workplace productivity soars – thinks to modern CAD software, rapid prototyping, the ability to source stuff to cheap manufacturing shops, the ability to source (and access detailed information on) a wider variety of components, materials & structures than ever before, etc.

        Regulation’s always been a burden for innovators – but with a little frustration, it is still relatively easy to circumvent. And innovation really is proceeding faster than ever – such metrics aren’t easy to agree on. But for many – from unique new products launched globally, to patent applications, to R&D spending, to the number of PhDs, to the general standard of education, to popular engagement in R&D/ development, to the level of corporate discussion of innovation & development, to the rate of life expectancy improvement, to the global rate of productivity growth, to the falling CO2 & pollution density of developed economies – we’re doing better than ever (especially at the global level).

        Innovation proceeds faster than ever – there’s plenty to back it up. Is there a shred of evidence to the contrary? We can and should do better – but shouldn’t we also celebrate the successes supported by our current institutions?

        • AdamGurri

          You clearly have your stories that you have a lot of confidence in, but I’m afraid I’m rather more skeptical of what you present here. First of all, the very fact that you need to seek exceptions in order to get things done means that you’ve introduced extra transaction costs to getting anything done–and the more people there are tying to get things done, the longer the line for those waiting to get exceptions.

          And there are clear cases where it doesn’t play out this way in practice. Do you deny that the FDA imposes over a decade of time and a billion dollars in costs to every new drug that attempts to come to market in the US? Do you think there aren’t any other industries that face similar obstacles?

          • gwern0

            Successful drugs are worth billions, which is why pharmacorps keep trying; are we expected to believe that the profitability of drugs is so finely balanced on break-even that a Chinese pharmacorp looking at a lucrative drug that risk-averse American pharmacorps have shunned will also avoid the drug because it may have trouble passing the FDA requirements long after the Chinese pharmacorp has developed and started selling it worldwide?

            In short, other countries are not as risk-averse as the US. Why are they not developing the huge breakthroughs that the US once did?

            Is the lack of regulatory arbitrage consistent with special conditions in the US and EU, or consistent with a global drought of low-hanging fruit?

            > In this story of uncertainty and lumpy progress, Google’s $50 billion makes a lot of success. In a direct response to Thiel, Arnold Kling pointed out that under high uncertainty there is a high option value to waiting to invest.

            $50 billion allows diversifying over at least 50 opportunities even assuming they all look like ‘we need $1b to go try and mine some asteroids’, and obviously the number of opportunities only goes up from there as the necessary investment shrinks. Is that not enough opportunities to hedge against risk?

            Here again, is this more consistent with some subtle point about regulators or option value, or there simply not being 50+ golden opportunities?

          • AdamGurri

            The money is not the only issue; the time is a big deal. The 12 years of trials matters–think of all the lives that were needlessly lost because a life-saving drug was in the middle of that 12 year queue.

            As to who is more or less risk averse, and why similar breakthroughs aren’t happening elsewhere–I admit my knowledge of the particulars here is quite weak, and pressing the point would border on simply being defensive. I know that Alex Tabarrok has done a lot of work in this and drawn similar conclusions. His Launching the Innovation Renaissance has a good, detailed treatment of the subject.

          • gwern0

            > gwern0: The
            money is not the only issue; the time is a big deal. The 12 years of
            trials matters–think of all the lives that were needlessly lost because
            a life-saving drug was in the middle of that 12 year queue.

            The delay is very interesting from the ethical point of view, but largely irrelevant to the innovation question of ‘where are the good new drugs and are there any?’, unless one was thinking of discounting over time reducing profit motive as the explanation which is like the above, unlikely.

          • AdamGurri

            If the 12 year delay means we have 1/10th the number of drugs we would have had in the past 40 years, I’d say it’s pretty relevant.

          • gwern0

            And how would it do that? History didn’t start 40 years ago, after all, and if a shift by 12 years was the entire explanation, then shouldn’t we see a huge glut of drugs in years 1 etc of the approval process? Shouldn’t we in 12 years be rejoicing in our cornucopia? Strangely, this coming boom does not seem to have been priced into pharmacorp stocks.

          • AdamGurri

            Not quite how it works. Companies will only develop drugs with the money that they have; the more drugs they are able to bring to market, the more drugs they’ll be able to fund the development of. A 12 year wait doesn’t just mean 12 years until we get the drugs, it means 12 years until they can turn around and devote those resources to developing new drugs.

          • R S

            What non-risk-adverse countries are you speaking of here?

            All the countries on the technological frontier are risk adverse – U.S., Canada, Western Europe, Japan, Korea.

            China is less risk-adverse but still far from the tech frontier. The same is true for other developing countries. India is more risk-adverse than China when it comes to tangible non-computer technologies because of a long history of democracy and accretion of special interests.

            The irony here is that the same aversion to risk exemplified by the regulation of pharmaceuticals, the nuclear industry, aeronautics, infrastructure, etc. is also responsible for the decline of inter-state war. We’re getting a democratic peace at the cost of progress.

          • gwern0

            My understanding was that South Korea, for one, was on the cutting edge of stem cell research which is a poster child of over-regulation.

            But supposing your claim about China not being close enough to the tech frontier to count was correct. Does that mean that you would agree if in 20 years we don’t see a flood of multi-billion dollar blockbuster drugs from China, you would be falsified and stagnation theories vindicated?

          • Derek Scruggs

            More than half of those drugs wash out during the safety phase. For cancer drugs the rate is more than 80%.

            Think of how many lives are saved because of that.

            Another two thirds fail to demonstrate efficacy. I’d like to see an analysis of whether “costs” for drugs that don’t work are just shifted. If companies could get their drugs to market sooner, presumably more people would spend money on drugs that don’t work or are bad for their health. That is a loss to the economy as well.

          • Derek Scruggs

            Recall that Tyler Cowen’s thesis is that the fir 70 years of the 1900′s were low hanging fruit – that is, those innovations were just more fundamental and easier to find. Penicillin is simply easier to discover than chemotherapy drugs. (Plus, a horrible world war made bypassing traditional safety trials easier. The same thing happened with HIV drugs.)

            I don’t believe he posits that government itself is responsible for stagnation, though he suggests changes that might help.

        • Andrew Greene

          Is there anything to be said for “creative circumvention” of regulation? I’m no expert, but it seems like much financial innovation was creative circumvention of regulation.

      • Jakob Munthe

        Isn’t a problem with the libertarian argument that the things he mentioned: Nuclear Power and Supersonic jets where both actually created by governmental research? So also the by far most important medical discovery in modern times, antibiotica (Fleming worked at a governmental university and it was WW2 that made his discovery wide spread).

        The libertarian arguement seems to miss fully how EXTREMELY important governmental research and sponsorship was in the last century to drive innovation.

        • AdamGurri

          The argument doesn’t have to be so simplistic as all government activity bad all private sector good. Thiel and Stephenson are much more interested in how our ability to do big projects has decreased overall, regardless of who was doing them. In the piece from Thiel’s startup class that I linked to, he gives the example of Robert Moses; pretty much as far from a typical libertarian idol as you can think of.

          Obama recently pointed out that government built the Hoover dam, but the fact of the matter is that our current regulatory framework (including, yes, how we regulate government activities) would never allow a project like that to happen.

          • Adam

            Can’t it be said that one of the reasons the government has less ability to pursue big projects over the last, say, 20-30 yrs, is because of the same ideological policies pushed by Thiel, Cowen, et al.?

          • AdamGurri

            It could be said, but it would probably be wrong. What slows things down are laws like NEPA that require truckloads of paperwork and studies before you can even start moving forward. And then you can get halfway into a project only to have it stall and die.

          • Derek Scruggs

            It’s not clear to me that more Hoover Dams == innovation. Thiel whines about not having his flying car, but is there any regulation preventing that?

            Also, he rails against the FDA but does not mention how many people die in China every year from bad drugs and coal mines.

            I actually agree that we are in a Great Stagnation but am not convinced of Peter Thiel’s reasoning.

          • Andrew Greene

            I agree with your first remark. I think there’s clearly not enough discussion of what innovation is. Thiel’s remark about flying cars versus 140 characters should be vetted.

            For your second point, then the question becomes: how many people is society willing to sacrifice in order to achieve faster development of technology? Who is taking and benefiting from risks? And who is on the bad outcome of those risks? What is the expected value of those risks?

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  • Kevin Dick

    First, I came over from Marginal Revolution and really liked this post. It was like reading something I’d written myself… if I were more clever and a better writer. We must consume a lot of the same books. Not surprising given that I’ve been following the GMU econ blogs for years.

    Second, the one story I wasn’t familiar with was Eli’s. At first blush, it seems really convincing. It also seems like it should be testable. If it’s true, people with access to technologies of resistance should be more and increasingly mobile. Middle class, with “builder” backgrounds, maybe? I wonder if there’s a good instrument for that demographic. Do you know of any work in this area?

    Third, it occurred to me that social networking and cloud computing are technologies of resistance. With social networking, it’s much easier to move about and remain friends with people. With cloud computing, you’re not tied to physical infrastructure. Both reduce location lock-in. It may be too much of a “just so” story, but I find it interesting that these two areas are where most startups seem focused (I’m a tech entrepreneur turned tech investor).

    • AdamGurri

      Thanks! :) I’ll bet we have read a lot of the same stuff. It makes sense you wouldn’t have known Eli’s argument, though, unless you knew him yourself or had seen someone link to those specific posts. He would probably have a lot better idea of what work has been done in those areas than me.

      Agree with you on social networking and cloud computing. An extra element is Clay Shirky’s story about group action–it might be harder to control us if social networks reduce the floor for getting an Arab Spring-like response.

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  • Ray Lopez

    I agree with the author, also this: “In Stephenson and Thiel’s story” so ask yourself: what have these two invented? The first, ‘stories’ sprung from his fertile mind, the second, “PayPal”–hardly rocket science. Perhaps their world view colors their bias about stagnation? Likewise Tyler Cowen, has staked out his claim based on his knowledge as an economist, not an innovator. But in general I agree we’ve hit a plateau in science, and like Gould’s Punctuated Evolution thesis are ‘due’ another burst of innovation soon, probably in the biosciences. Until then, we must survive the present recession. I am hoping governments collapse, as they are a brake on innovation (the flawed patent system notwithstanding, which btw can probably be replaced by trade secrets without too much disruption, as after all most real innovation is not done by reading papers or patents but by hiring key inventors (i.e., trade secret not patent)).

  • predius

    I agree with you a lot, and I think that the next few years are of extreme importance. Mass internet coordination makes it simply impossible for large industrial era (banking, state, broadcast media, etc) to act effectively in the ways that they are used to do it. Though I think Thiel has a very good point on regulation, I think tech has started outpacing regulatory bodies.

    For example, PayPal could perfectly well be co-opted by any existing state organisation into doing its bidding regarding managing undesirables’ funds, acting in certain ways etc. But with Bitcoin (and I think Bitcoin is just the first of many non-state currencies using RPOW to create valued tokens), that power over the transactions is lost, and current centralising entities (state and banks) have no oversize power compared to the average user.

    If no one uses the dollar, then what happens to the US government? Even if the US government starts accepting taxes in p2p currencies, then it loses _a lot_ of its power over the financial and monetary system, with the corresponding loss of power from state-enterprises such as Finance ministries and banks.

  • ezracolbert

    “FDA charges 1.3 billion to develop a new drug”
    1) we don’t really have indpendent sources their; teh Tufts group is really independent
    2) the FDA doesn’t charge a darn thing; they simply ask, is the drug safe and effective
    3) the reason it costs the industry 1.3 large to comply with the safe and effective is complex, but the main reason – leaving aside lavish CEO salarys, the normal stupidity that goes with any human enterprise, perverse incentives that make Vaccines and antibiotics [particularly for gram neg bugs with extended spectrum beta lactamase – really scary those) etc,
    the main reason, is that we don’t actually know alot about the human body. We know an incredible amount more then we knew 20 or even 10 years ago, but the proper frame of ref is how much do we need to know to produce drugs cheaply.
    Since it costs 1.3 large, clearly we don’t know much, cause most of the 1.3 come from the fact that most drugs fail, and they fail late in clinicals.
    to repeat: we don’t know a lot, and as a result most of the pharmacuetical industrys time and money is spent on blind alleys, cause we don’t know enough to knwo that the alley is blind.
    To give an example: we don’t have hi res xray crystal or NMR structures for all but a handfull of human proteins, much less the harder to work with membrane receptors that are esp important
    your argument about google and money in the bank has a fundamental flaw: if you have x billion in the bank, there are alot of ways to spend it, and *most* are not profitable – that is, your choices and risks are keep the money – low risk, no one ever got fired for a healthy balance sheet, or spend on v high risk startups or new ideas.
    you was a C site exec answereale to stockholders, what would you d o ??

  • Pietro Poggi-Corradini

    Great post. I’m on the “there is no great stagnation” side and more specifically on the “seen-and-unseen” Bastiat version of “there is no great stagnation”. For one, the last 30 years coincide with an unprecedented opening up of trade with China, of immigration, of social and cultural revolutions, from women liberation to the civil right accomplishments, to the explosion of air-travel, tourism, and the fall of major totalitarian systems around the world. So, no. There is no great stagnation, thank you very much.

    • AdamGurri

      Thanks! Playing stagnationist’s advocate for a moment here, you could argue that that view is in harmony with theirs. None of them are arguing for a global stagnation–Thiel and Cowen explicitly acknowledge that the developing nations have had a fantastic few decades lately. But their discussion is specifically with how far we’ve managed to push the technological frontier in that time, which they argue is not that far compared to a similar period before that. So the world is getting wealthier, and us along with it, but in terms of automobile or airplane level technological breakthroughs, we haven’t really seen much of anything. That’s one story, anyway.

      • Pietro Poggi-Corradini

        Yes, but I don’t know who said this: “growing corn in Iowa is technology”, because the corn is shipped to Japan and they ship Toyotas to us. What happens if you count the changed patterns of production resulting from trade as part of the “technological” change? After all the effect on employment and consumers is similar, the same kind of displacement, reallocation of labor etc…Comparative advantage does not predict that one side gets all the advantages and the other side stagnates as a result of the exchange. I think the mistake is to focus on a narrow definition of ‘technology’. I also don’t like when such narrow version of ‘technology’ is used as a root cause to explain larger trends. As in, we found all the major inventions in the previous period so we’re stagnating now. I have a similar problem with, say, explanations of the Industrial Revolution that point to specific technological breakthroughs as ‘root causes’. I think the mystery is to explain why technology occurs, what causes *it*, not the other way around.

        • AdamGurri

          Very well put. An alternative story to the stagnation would be: we are in the midst of a globalization of trade unheard of since the 19th century. It is far more profitable to optimize to that new reality than to invest in sexy new technology. Once we hit a point where growth in the developing world starts to slow down again, maybe then it will become necessary to push what we typically think of as the technological frontier.

  • AdamGurri

    Well yes, we’re still in the process of finding out how the story of the Arab Spring will truly conclude. But surely if any given regime believes there is a credible threat of something like an Arab Spring, they are likely to be more wary of being overbearing. Just one possibility.

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  • Nathanael Snow

    Great post. Among the most detrimental technologies of control, of course, is the patent system. If you think innovation occurs smoothly, almost continuously, then patents are unnecessary, and creative destruction under competition is sufficient for innovation to occur. If you think innovation is lumpy and serendipitous, then patents are unnecessary because serendipity cannot be incentivized. If lumpy innovation requires gobs of research then it might not be efficient. How can we know where the next lump will emerge? Subsidizing research and development seems to me a massive mistake. Every green technology developed may come at the expense of some other innovation that might have even more beneficial uses.
    That Eli distinguishes well between innovating technologies of resistance and technologies of control provides a new margin on which to choose where to invest in innovation.
    BTW, I think Alchian cites a study on coin flipping in his Evolution paper in which the possibility of strings of successes demonstrates that innovators don’t (can’t?) know where success will emerge next. Entrepreneurs may not actually choose the winning strategy or product, they may merely get lucky and provide the strategy or product conducive to the new market conditions, which change no one knows quite how exactly.

    • Jeffrey Horn

      Serendipity can be incentivized. Chance favors the prepared mind, no? What inducements do I have to prepare? And, more to the point, what inducement do I have to share?

      To put it another way, pure serendipity is like being struck by lightning at the top of the hill. Oughtn’t we encourage people to spend some time on the hill?

      IP critics aren’t often aware, or choose to ignore, that patents serve at least two functions: to protect innovations that are easily profitable (the point we all usually address) and to encourage trade secrets to be shared when the cost of maintaining the secret is (relative to patents) high.

      To address another minor point, I’m not sure if you’re conflating subsidies with patents. I think it’s possible to mount a liberal defense of patents without advocating for subsidies.

      • AdamGurri

        1. Tabarrok has shown that there are very few scenarios in practice that we can find that patents made a difference, outside of the pharmaceutical industry.

        2. Patents may once have been about sharing trade secrets, but if you look at software patents today, they are these broad, encompassing thing from which it is not actually possible to create a working piece of software. The principle of making secrets public may be a good one, but arguably it has been lost from modern patent practice.

        But I agree that serendipity can be incentivized. I think Nathanael’s point is that these things get incentivized in the typical course of competition–see Boldrin and Levine.

        • Xenophon

          Here’s some anecdata regarding software patents:

          Over the period in which software patents became a reality I worked in the R&D group at a small software vendor. Before software patents, ALL new innovations were held as trade secrets without regard to whether they were relevant to our products. Relevant innovations went directly into the product line; others were dropped on the floor. Any time I wanted to publish something, management would respond “No! That’s a trade secret!”

          Software patents changed the corporate attitude regarding publication. The new conversation went more like this:
          Me: “I want to write a paper about [new thing].”
          Mgmt: “No, it’s important to our business.”
          Me: “Do we plan to pursue a patent on it?”
          Mgmt: “It’s not *that* important…”
          Me: “So we’d better publish quickly, before someone else patents it out from under us.”
          Mgmt: “Start writing that paper *now*!”

          We pursued patents on substantial innovations (thus making them public), and published the rest. That’s a complete change brought on by the *possibility* of patents, even for the innovations that were too small to be patent-worthy.

        • Jeffrey Horn

          Software patent arguments don’t move me much. I seem perpetually on the fence about them. Are they the only broken part of the patent system?

          Point 1 is definitely something to consider, but what do you mean by it doesn’t make a difference? A difference in what? I still haven’t read the book.

          I didn’t get the interpretation of Nathan’s comment you did, but I think you’re right. I started out well in-support-of patents, and I don’t think I gave Boldrin and Levine a serious, fair study. I do remember the EconTalk episode to be quite good, however.

  • Brian Slesinsky

    I think the main problem with this post is taking Peter Thiel seriously. We don’t need to speculate about why supersonic airliners don’t work, and it has little to do with legal issues and a lot more to do with energy economics. Given the airline industry’s vulnerability to fuel costs, it’s not hard to understand why Boing cancelled the Sonic Cruiser (the faster plane) in favor of the 787 (the more fuel-efficient one). And the reasons why flying cars (or really, drivable airplanes) are a tiny market at best aren’t hard to understand if you look into the economics of general aviation. This isn’t to say there’s no room for innovation, but it requires understanding and working around physical and economic constraints, rather pretending they don’t exist.

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  • Grüss Gott

    This post is stupendous, but the more I think about it, the greater my uncertanty.

    • AdamGurri

      You and me both!

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