The Economics of Ideas & Asia

The Economics of IdeasRISE OF ASIAN ECONOMIES-JANUARY 2015-SESSION 7

Does Pythagoras own his theorem?Why is that question important (or not important) ?

What is in the nature of the theorem, if we consider it as an IDEA?

How did the theorem diffuse across the world? What has been its uses?

Were there market incentives to encourageideation/adoption/diffusion/implementation of the theorem?

What are other theorems that build on Pythagoras Theorem?

Rivalrous Non-Rivalrous

High Excludability

Low Excludability

Ideas are Dime a Dozen…What About their Broad Nature Though?

Thinking about Ideas as Goods Rivalrousness & Excludability

Source: Romer (1993)


High Excludability Lawyer Services; CDPlayer

Encoded Satellite TVTransmission; Computer Codefor a Software Application

Low Excludability Fish in the seaBasic R&D; National Defense;Calculus



Source: Romer (1993)


High Excludability Lawyer Services; CDPlayer

Encoded Satellite TVTransmission; Computer Codefor a Software Application

Low Excludability Fish in the seaBasic R&D; National Defense;Calculus

The Commons



Remember R & I in the VRIO framework? Source: Romer (1993)

At The Margins?

Public Goods

Non-Rivalrousness & Low Excludability Gives Rise to? Spillover possibilities & Externalities

Non-Rivalrous Goods have a fixed cost of one-time production in contrastto Rivalrous goods. Ideas are Non-Rivalrous (excludable only through market-mechanisms)

Gives rise to INCREASING RETURNS & IMPERFECT COMPETITION

Central to Economics of Ideas

“If you think of [opportunity] in terms of the Gold Rush, thenyou’d be pretty depressed right now because the last nugget ofgold would be gone. But the good thing is, with innovation,there isn’t a last nugget. Every new thing creates two newquestions and two new opportunities.” Jeff Bezos, founder ofAmazon

Central Philosophy Behind …Romer Model & Endogenizing A

IDEAS

NON-RIVALRY

INCREASING RETURNS

IMPERFECT COMPETITION

Unlike Solow Model..Technology is no longer a Manna from Heaven

But What About Technology & IR – Example?

Iron Oxide earlier used in Neanderthal Paintings were later on used in Magnetic Tapes Quality Adjusted Price of Light has fallen 4000 times since 1800 (Nordhaus 1994)

But if Ideas are so important..How do they impact Economic Growth?

“A surprising number of innovations fail not because of some fatal technological flaw or because themarket isn’t ready. They fail because responsibility to build these businesses is given to managers ororganizations whose capabilities aren’t up to the task…Most often the very skills that propel anorganization to succeed in sustaining circumstances systematically bungle the best ideas for disruptivegrowth. An organisation’s capabilities become its disabilities when disruptive innovation is afoot.”Clayton Christensen, academic (1952–), The Innovator’s Dilemma (1997)

“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a newcapacity to create wealth.”Peter Drucker, management writer (1909–2005), Innovation and Entrepreneurship (1985)

“Ideas rose in clouds; I felt them collide until pairs interlocked, so to speak, making a stable combination.”“Invention consists in avoiding the constructing of useless contraptions and in constructing the usefulcombinations which are in infinite minority. To invent is to discern, to choose.”Henri Poincaré, mathematician (1854–1912), Essay on the Psychology of Invention in the Mathematical Field

But if Ideas are so important..How do they impact Economic Growth?

“The opening up of new markets, foreign or domestic, and theorganizational development from the craft shop and factoryto such concerns as U. S. Steel illustrate the same process ofindustrial mutation-if I may use that biological term-thatincessantly revolutionizes the economic structure from within,incessantly destroying the old one, incessantly creating a newone. This process of Creative Destruction is the essential factabout capitalism.” – Schumpeter in CSD

Ultimate Description of Creative Destruction:

“Large corporations welcome innovation and individualism inthe same way the dinosaurs welcomed large meteors.”

Who said that?

A Little Bit of Math is Good for Health A Bare-Bones Romerian Idea-Model 1/5

Y = Kα * (A*LY )1-α

Solow Model: 𝒌 = sY-(n+d)k

- But let’s say, the rate of ideas is a function of ideators & ideation-rate in the economy,

thus:

𝑨 = 𝜹 LA –------- (1)

where LA + LY = L


The rate at which ideas are discovered might be dependent on initial stock of ideas, positively

or negatively, which implies:

𝜹 = 𝜹 ∗ 𝑨𝝋 -------- (2)

- Where 𝝋 < 𝟎, 𝝋 > 𝟎 & 𝝋 = 𝟎 have their intuitive explanation, what?

o IR (SSG effect), FO effect, Independence effect.

o Knowledge spillover parameter at the ideators level.


Now 1 + 2 gives us:

𝑨 = 𝜹 ∗ 𝑨𝝋 LA

or more intuitively: 𝑨 = 𝜹 ∗LAβ * 𝑨𝝋 ---- 3

where 0 < β < 1 – indicating what?

(the stepping on the toes effect capturing duplication)


- Now on to Ideas & Growth:

- W/some leap of faith & reading of Chapter 2, you will know that during balanced growth:

gy = gk = gA

gA = 𝑨

𝑨

but 𝑨 = 𝜹 ∗LAβ * 𝑨𝝋 as in Equation 3 above.

So, dividing by A on both sides gives us:

𝑨

𝑨= (𝜹 ∗LA

β ) / ( 𝑨𝟏−𝝋 )


RHS of right hand side can only be a constant (gA) if numerator and denominator grow at the

same rate, thus:

𝟎 =

𝛃 ∗𝑳𝑨𝑳𝑨

− (𝟏 − 𝝋) 𝑨

𝑨

𝑨

𝑨= (𝜹 ∗LA

β ) / ( 𝑨𝟏−𝝋 )

Or rearranging:

gA = 𝜷∗𝒏

(𝟏−𝝋)

In English Language at last

- Growth in ideas in the steady state drives growth in output.

- In theory, growth in ideas is increasing

- in duplication parameter

- growth rate of ideators/innovators/researchers in the economy

- and the knowledge spillover parameter of ideas.

Some Associated Questions

- How will you test all of these empirically & make policy/managerial

recommendations?

- What has research found?

- Can we differentiate based on the quality of ideas? Look up Basic versus Applied

Research / Radical versus Incremental Innovation

- How about the nature of ideators? Look up Pasteurs Quadrant.

- What role here is of incentives for innovation?

- Short run versus long run effects?

- Why is the market for ideas an imperfectly competitive market?

- Agglomeration economies in ideas? Look up the Anchor-Tenant Hypothesis

- Spin-offs and nano-economics? Klepperian Economics.

Dude – What is the Asia Story?

- Less of Innovation & More of Imitation

- Access versus Innovation – The Societal Debate

- Intellectual Property’s Burial Ground

- Trans-Pacific Partnership

- China’s Rise in Innovation

- Japan lies as an outlier

- Low-Cost Innovation (Frugal?)

- But Asian Innovation is Changing Pioneered by the Rise of

Koreans, Chinese, Japanese and now a tinge of Indian

Firms

Fast Facts – on Asian Innovation In Asia alone, there are almost 9 mobile phones for every 10 people. With 3.5 billion mobile subscriptions, consumers in

Asia and Pacific now account for more than half of the world’s total mobile service market. Testing ground for Marshallian Scissors

PRC and India, have doubled their research and development (R&D) investments and increased their share of R&D in2007-12 to nearly 20% of the world total. Will The Vannevar Bush Linear Model of Research Work?

Asia’s Innovative Labor Market Gap: By 2020 in Asia, it is estimated there will be a shortage of 38 million-40 millionhighly skilled (college educated) workers, a shortage of 45 million medium-skilled (secondary education) workers and asurplus of 90 million-95 million low skilled workers. It’s All in the Idea/Ideators stupid? Can Asia scale up beyond primary to higher education?

Cloud computing is expected to generate 14 million jobs globally by 2016, with 10 million coming from the PRC, India and the wider Asia Pacific region. So What?

The PRC; Hong Kong, China; and India were among the top 10 exporters of creative goods in 2008, accounting for over30% of total global exports. How much of these are IP protected creative goods?

Expect tons of Frugality Oriented Business Model Innovation to ride past Institutional Impediments

Source: Asian Development Bank

Asia on a Creativity Index

http://www.thinglink.com/scene/565367039070306305

Source: Asian Development Bank

But What is Happening to Innovation in US?Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six HeadwindsRobert J. GordonThis paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow's seminalcontributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, andthus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 yearscould well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 whilepretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K.until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, andhas been slowing down since. The paper is about "how much further could the frontier growth rate decline?“ The analysis links periods of slow andrapid growth to the timing of the three industrial revolutions (IR's), that is, IR #1 (steam, railroads) from 1750 to 1830; IR #2 (electricity, internalcombustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and IR #3 (computers,the web, mobile phones) from 1960 to present. It provides evidence that IR #2 was more important than the others and was largely responsible for80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning,interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once - urbanization,transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and airconditioning in achieving a year-round constant temperature. Even if innovation were to continue into the future at the rate of the two decadesbefore 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rateexperienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang ofconsumer and government debt. A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.Source: http://www.nber.org/papers/w18315 & http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/qa-why-robert-gordon-thinks-growth-is-over-and-what-we-can-do-about-it/

http://www.nber.org/people/robert_gordon

http://www.nber.org/papers/w18315

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/qa-why-robert-gordon-thinks-growth-is-over-and-what-we-can-do-about-it/

Let’s Listen to Bob Gordon’s ArgumentsListen later to Erik Brynjolfsson’s counter-arguments

http://www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth?language=en

Tomorrow

- What is the Singapore model of economic growth & development?- What role is there of innovation in Singapore?- Compare and contrast Singapore with HK?- Compare and contrast Singapore/HK with Japan

So Whose Theorem was it? Pythagoras or…?

Did India discover Pythagoras theorem? A top mathematician answersLast updated on: January 09, 2015 15:20 IST

The Pythagoras theorem 'should either be an Egyptian theorem if you look at the

standard of just having an idea about it, an Indian theorem if you're looking for a

complete statement of it, or a Chinese theorem if you're looking for the proof of it,'

Fields Medal winner and Princeton University Professor Dr Manjul Bhargava tells P

Rajendran/Rediff.com

http://www.rediff.com/news/special/did-india-discover-pythogoras-theorem-a-top-mathematician-answers/20150109.htm

http://rediff.com/

Education

The Economics of Ideas & Asia