Arnold Kling  

Idea Rents

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Thoughts on Unemployment... Foreclosure "scandal" again...

Tyler Cowen writes,


What if ideas rather than land are the fixed factor? Wages and profits stagnate. Some "idea landlords" receive enormous pecuniary returns, while others do not.

I think that the standard estimate is that innovators earn less than 2 percent of the surplus from their ideas. Further remarks:

1. For really important ideas, there is a lot of surplus. For those ideas, someone who gets a significantly non-zero portion of the surplus is super-rich (Bill Gates), someone who gets a less significantly non-zero portion of the surplus is rich (Jim Clark, Marc Andreessen), and someone who gets essentially 0 percent of the surplus is only modestly affluent (Tim Berners-Lee).

2. One reason that ideas do not often generate significant rents is that they can easily be copied. A lot of the reward goes to those who come up with ways of creating and capturing rents, not necessarily for those who create the most valuable ideas. (Again, Gates vs. Berners-Lee illustrates this.)

3. Many workers in the Garett Jones economy are paid for coming up with little ideas. These are not ideas that produce staggering rents, but they are ideas that incrementally improve business processes. Little ideas matter a lot in the aggregate, and therefore Bill Gates does not capture all of the wealth. The distribution of income is going to be winners-take-much, but not winner-take-all. The typical Garett Jones worker can earn a decent living.

4. Bureaucracy represents a top-down mechanism for allocating rents from ideas. The stock market represents a more bottom-up mechanism. Both mechanisms are highly flawed, and certainly other mechanisms might emerge.

Many of the first 125 essays that I wrote were on this topic. See, for example, Asymptotically Free Goods:


An asymptotically free good is a good where almost of all of the cost involved consists of research and development.

In A Meditation on Innovation I suggested that in the future valuable innovations will be innovations in how we filter innovation.

Going forward, the pressures on our processes for filtering and adopting innovations are going to experience stress. For change to accelerate, there has to be continuous improvement in these processes. We need to get better and better at filtering and adopting innovations. Otherwise, these processes will become bottlenecks in the innovation system.

I think that the adoption and filtering bottlenecks will start to have a visible effect on the rate of technological progress within ten years. Perhaps we will look back in ten years and say that the deceleration of change had already begun at the time that I wrote my essays.

Another way of making the case that a deceleration is inevitable is to do so in terms of the rate of obsolescence. Innovations make old technologies obsolete. As the pace of innovation speeds up, the pace of obsolescence must speed up. How fast can it go?

Finally, from a summing up of my first 27 essays.

The critical resource to allocate in today's economy is no longer capital, but talent... The institutions best suited to allocating talent probably have not yet evolved. Neither bureaucracies nor the stock market are likely to continue to be as central as they are today.


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COMMENTS (9 to date)
Pat writes:

What does "Garrett Jones Economy" mean?

Arnold Kling Author Profile Page writes:

Garett Jones pointed out that most workers today do not produce widgets. Instead, they produce organizational capital.

It might still be 2% on average given the extreme tail cases. But the median now -- for the reasons you give -- must be much less than that. I see things almost the same way.

Matt Shulman writes:

I think that the more important and valuable the idea, the more likely it is that someone else will come up with the same idea in the near future. So, it is good that the inventor of the valuable idea receives a return, but the return should be related to the additional surplus from causing the idea to be realized sooner (not the entire surplus of the idea over all time).
(Interestingly, this implies that sometimes a "small" idea is as valuable as a big idea, because for the small idea there is a risk that no one else will get to it for a long time.)

A dude writes:
The institutions best suited to allocating talent probably have not yet evolved.

This is the key to everything else. To get proper allocation of talent, property rights for ideas need to become more efficient. Right now they are enforced via a cumbersome and costly patent process, padding (need to buy a 300 page book to extract 2 pages worth of ideas), or obfuscation.

It's unclear how much this slows us down (best scientists are motivated by discovery process itself), but the system looks very inefficient.

Dorian Taylor writes:

Is it possible to get a reference on that 2% figure? (I don't doubt it, though I would like to see how it is composed.)

Rebecca Burlingame writes:

It would be hard to turn ideas into a fixed factor, they're too infinite and hard to pin down in terms of value. But some of the best tools going forward could be those which turn knowledge into action, instead of treating it as a product to be passively consumed.

Jacob Oost writes:

What about the people who are both Berners-Lees AND Gateseses? Like the founders of HP and Intel, for example? I keep trying to find information on inventors and engineers and how much money they tend to make off their ideas (like the people who came up with the transistor, the IC, wifi, and so forth) versus how much money businessmen who exploit their ideas make, but info on this is hard to find. It's hard to find a comprehensive list of prominent tech companies founded by engineers and scientists, and I've Googled! As a physics/compEng major who wants to start his own business when he graduates, I'm interested on what things are like for entrepreneurial engineers.

Do people like Berners-Lee and Faggin achieve mere affluence rather than superwealth *because* they lack the entrepreneurial drive or business skills? Or are we talking about people whose ideas are too easily copied for them to really exploit? (such as the web)

MernaMoose writes:

Arnold,

Excellent post.

The institutions best suited to allocating talent probably have not yet evolved.

Probably true. But as someone who's spent most of my career in R&D, I say the first stage of this problem is: people have to get better at recognizing talent when they see it.

Many, many of the 4.0 gee-whiz wonder kids, who had the big name scholarships etc, that I've seen come out of universities, have proven to be poor innovators on the job.

The best idea generators (innovators) that I've seen were, on average, decent students but not at the tops of their classes.

Lesson 1: getting straight A's takes a particular kind of talent, but it is a talent that has nothing in particular to do with being innovative.

Sad truth is that our institutions today are geared to believe that the 4.0 students are going to be the best innovators. But after years of R&D project lead experience, I tend to be skeptical that the 4.0 types are going to get me much for results. They'll generate sh**loads of data, yes. But my best hope is that this data is good enough to inspire somebody else to come up with the main break throughs.

Neither bureaucracies nor the stock market are likely to continue to be as central as they are today.

Mmmmm......this, I'm not convinced of.

As much as I understand the rigidity and inefficiencies of large institutions, don't underestimate what they do provide for us.

There is a reason mega-corporations exist. I've griped about them (and been bashed for bashing them), because (my opinion) they often don't give the end customers what they really want. Big corporations for example, are geared to aim at the middle of the bell curve and this leaves much out of the many people who are not smack in the middle.

Maybe huge corporations exist because we haven't found a better organization approach. But somehow, capital and other resources have to be mobilized on vast scales in order for things to get done -- and for this, amazing new ideas to get translated into practical use.

And maybe now I'm talking in circles. Anyway this is an idea worth thinking some more about.

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