Some of my views on economics

Economic efficiency relating to technology

"Necessity is the mother of invention" - But this article will argue that sometimes
the needs of a single person is not enough to motivate the inventors amongst us.

Terminology

Technology - Information that allows people to produce new goods and services, or allows people to produce goods more efficiently. Note that we will consider (natural) science as an intermediate step in the production of technology.

Cost - For the purpose of this article we look at economic cost as opposed to the nominal (money) cost. Note that it is not always possible to calculate economic costs (and benefits) exactly. Different techniques give different answers.

Introduction

Any economist worth his salt will tell you that many of the economic policies in place today goes directly against much of the advances made in the science of economics during the last few centuries. It's as if the population at large has decided they'd rather use a abacus for counting than the state of the art computer that is sitting on their desk. So although this article will argue for government intervention on some specific issues, I'd prefer that the government does not interfere in most economic areas.

Let's start by considering a sector of the economy with many competing producers of which no producer holds a significant market share, e.g. farming, and in which it seems unlikely that a single producer can make significant technological progress. Under capitalism, the goal of each farmer is to maximize his profit. So each of them will hire more workers, buy more seed and lease more land as long as the expected nominal income from that expansion exceeds the expected nominal cost of that expansion. The consequence is that production is optimal, and hopefully enough food is produced that no one stays hungry.

Next we consider an industry in which oligopoly takes place i.e. there are only a few producers and they all have significant market share. An example of this is high end microprocessors (CPUs). For the purpose of this discussion we will look at the short term, and extra investment in technology will not make a significant difference. Once again, the goal of each producer is to maximize his profit. So each producer will consider the effect of increasing (decreasing) his production by one more CPU. Since it increases (decreases) the supply, it decreases (increases) the market price, and hence the price on all his existing units. So even if he will make a profit on this extra CPU, he will not necessarily increase his production. The optimal economic situation will therefore not be reached. Experience have shown that output is quite near to the optimal, and not much can be done except removing some of the barriers to entry. Note that producers can sometimes sell equivalent products under different names and at different prices and this brings output closer to optimal, because increasing supply in the low end of the market does not affect the supply at the top end of the market.

Technology and Capitalism

Let's now consider technology, and forget about any preconceived ideas in relation to copyright, patents and capitalism. As an example we can look at operating systems. Note that we mean only the piece of software that governs the interaction between all the other programs i.e. the user interface is not part of the operating system.

Now a "state of the art" operating system does not use up a significant amount of CPU cycles, memory or other resources. Therefore, if optimal economy situation prevailed, all computers will run this operating system, regardless of weather they use its advanced features or not. There will be no need for anyone to write a competing product. Further more, when someone needs to develop a specialized operating system for a special use or special hardware, that person will have access to the source code of the original operating system.

But this does not happen. I estimate that more than a hundred personal computer (PC) operating systems have been developed. The amount man hours that could have been save, had we earthlings worked together, could be in the billions. Certainly capitalism cannot be blamed for some of the waste, as all kinds of human weaknesses (pride, sunk cost fallacy cultural differences, etc.) played a part.

Under capitalism, there are two undesirable extremes : Either the wheel is used to its full potential due to the fact that is was reinvented numerous times. Or no one wastes time in reinventing it, but it is used sub optimally as the inventor optimizes his profit by asserting his rights.

Giving someone ownership of technology has many undesirable consequences. Experience has shown that the owner of a technology expends most of his efforts not in development of new technologies but in trying to ensure that he will receive his royalties.

It is true to a certain extent that capitalism incentives entrepreneurs to develop new technologies. However, it happens more frequently that the inventor of a world alternating technology goes not get any monetary reward for his contribution. For example, many computer scientists have made major contributions to the field of operating systems, yet very few of them have received compensation form Microsoft.

Note that one of major reasons for the success of capitalism is that it places the power in the hands of those who have used it most wisely in the past and who will continue to do so in the future. However, when it comes to technology, it happens regularly that those who made the greatest contributions, have no say in how the world allocates its resources.

Recommendations

I recommend a new system that will work in parallel to the existing system of copyright and patents. The basic idea is that governments should identify key technologies that will drive economic activity, develop those technologies and license them for free to its own population. In many cases governments will recoup their investment by means of taxes.

But even in those cases where the increased tax revenues does not cover the development costs of the technology, its development may still be worthwhile : As long as the total economic benefit (taxable plus non-taxable components) of the technology is greater than its cost, it is a success. The reason is that governments there to improve the standard of living of their population.

Some politicians will want to impose industry specific taxes to pay for the industry specific technologies that have been developed with its money. For example, if governments decide to develop an operating system, they may want to place a new tax specifically on each computer sold. While this tax structure will be quite close to optimum, the optimal tax will be a percentage of the utility they derive from the operating system (or if they choose to install a different operating system, the utility they derive of it). In other words, large corporate who constantly run many different applications at the same time, should pay more than home user who typically run only one application at a time.

I recommend that governments still hold the rights to the technologies they develop, and not place them in the public domain. The reason is that they can then charge foreign personal a usage fee on those technologies. I suppose that over time cooperation between governments will increase and in that case the resultant technologies should be freely available in all the countries that contributed to its development.

There are two possible ways of rewarding people making contributions, and I am inclined to feel that the second one is best. One way would be to pay them as the work gets done.

The other way would be to reward them as the technology gets exploited. The reason why I believe in this second approach is that it forces the contributor to concentrate on those technologies that will actually be practicable. It also forces the contributor to think about the other economic issues such as interest rates and risk.

Calculating the effect of a technology can be very difficult and it will never be an exact number. But there are ways to quantify these effects, similar to the citation indices that librarians use. Even if developers of new technologies are only rewarded one percent of the effect their technology had, it will be enough of an incentive for many.