Some Game Theory of Innovation

by Will Wilkinson on December 9, 2009

Folks, listen to Angus:

Class, repeat after me:

(1). Green jobs are NOT a zero sum game where nations are competing for a fixed number of them.

(2). If China or Germany or anyone develops “innovative energy technology”, that is NOT bad for us.  It is in fact *awesome* for us, as we can then adopt it and use it.

People, ideas are public goods. That is the whole basis of new growth theory. If China is now doing cutting edge R&D, that is an unmitigated blessing for everyone on the planet.

This is why it ought to be an embarrassment to exclaim in horror that the U.S. may be “falling behind” in the development of green technology. It is rather more illuminating to see government subsidies to research and the development of speculative technology as contributions to a collective global effort to explore the space of technological possibility.

The expected return to the average German taxpayer from German state science and technology subsidies is probably negative. But the global citizen’s expected return to global investment is probably positive. And the more others invest, the more positive the expected return is.  If some Taiwanese firm makes an enormous breakthrough, everyone will get to internalize the benefit of this new technology. We just don’t know in advance if the Germans or the Taiwanese or the Canadians or the Americans or whoever will make the discovery.

This kind of global cooperation sounds nice, doesn’t it? But we know all about games like this, don’t we? If Canada, say, puts an end to all state subsidies for science and tech, this really won’t much affect the probability of a major efficiency-enhancing discovery somewhere or other. Which implies that the average Canadian taxpayer, now paying for no national R&D subsidies, would see her expected return from international R&D subsidies go up. (And the greater the extent to which subsidies tend to go to the best subsidy-seekers rather than to the best innovators, the less taxpayers should worry about the downside of withdrawing their state’s support from the global effort of discovery.)

As a general rule, if nothing bad will happen to you if you free ride, it’s smart to free ride. Worrying that other countries are pulling ahead is like worrying that the other oarsman in your boat will beat you to the destination if you’re lazy. You’re in the same boat! The smart thing is to goad everyone else into going as fast and hard as they can. For a good while now, America has been a dim kid with ape strength happy to carry half the world as long as he gets to fist-pump, flex his pecs, and chant U.S.A.! U.S.A.! in the mirror each night. It’s a darn good deal for the rest of the world. America’s just too dumb to feel exploited. And too idiotically vain to enjoy a free ride.

  • If only the US government will put hubris away, lock it up for a moment and realize that this is not a game of racing, then we would now be basking in the benefits and rewards of abundant green jobs and projects. Sigh* we've wasted enough budget, time, and effort. Will we ever learn?
  • MichaelDrew
    Sorry, but this is dense. It's not about national pride in innovation, it's about where the technologies that turn out to be marketable end up being manufactured -- jobs, jobs jobs. if the technology is developed here, the argument goes, there is a better chance that their mass manufacture will occur here as well. That may not turn out to be true, but I don't think it's clear one way or the other at this point, and it's certainly plausible in my estimation. In any case, it's not about USA, USA, it's about American jobs.
  • mk
    It is good to get a good ROI but it's also good to have industries that employ people. If your people don't have the expertise to innovate in a high-growth emerging industry, you may be neglecting the opportunity to have good sources of employment sitting in your country employing people.

    If everybody in China or wherever designs all the cool new technologies it really is (probably) true that China or wherever will be more likely to employ a lot of people to design and build those cool new things. We'll buy them and be happy about it but Americans really do have to do something. There's lots of things that Americans can do other than building those particular gadgets, but the more industries that want to employ people in the US the better.

    Now, how does a government know if an industry is going to be tomorrow's hot new employment-driver? It doesn't know. Maybe VC firms are better at that. But VC firms will tend to underprovide research funding because of the very free-riding, knowledge-spillover reason that you cite in your post.

    Since government is not driven by profit, it can underwrite the ground-breaking research that can create tomorrow's employment providers. Since it is government, it will also do a lot of stupid useless crap and funnel money to cronies. The question is how much do you get of each. And, it depends on the situation.

    At least that's how I see it.
  • paulopinion
    Will,
    Nice link and commentary. You are so right in stating that the USA has created many breakthrough technologies that have benefited the rest of the world. It is logical that the ROI was more for the folks who cloned our ideas/technologies. There's nothing wrong with a good ROI. Fist pumping don't pay the bills.
  • Point taken, but if your fellow oarsman paddles as fast as he can and you do not, don't you end up going in circles? In which case neither of you will reach your destination or at the very least be wildly off course.
  • dWj
    The US is a significant chunk of the world. If we've ramped up "green jobs" to the point where a new "green worker" is worth $30,000 or so to the world, then if we attribute that by GDP, $7500 of it accrues to the US. By population, it's only $1250; we could, in broad terms, though, split the difference, and estimate maybe $3000 to $4000.

    Of course, you can't hire a worker, especially with any technical skill, at that price; this more or less answers Andy McKenzie's question about why bearing all the cost and sharing the benefits is unlikely to yield a net positive. We could, however, get a net positive if we hire the new green worker in China, where labor costs run in the appropriate ballpark. So it might make sense for the U.S. to fund green jobs out of U.S. taxpayer money -- provided that they're green jobs in China.
  • Will, do you have a citation for the fact that "The expected return to the average German taxpayer from German state science and technology subsidies is probably negative."? Agree globally it's positive but I don't see why that implies it has to be locally negative. Love your blog. Thanks.
  • "Probably" means "I don't really know, but I'd bet on it!"
  • Angus is partly right: ideas are public goods -- but use of ideas is not. Patent law is international, and no new technology that is extremely valuable will just be granted as a free license to global competitors. Granted, as long as the license costs less than the next cheapest substitute, it will benefit everyone. But it will considerably benefit the homeland of the technology's patent owners.
  • dnieporent
    No, it will considerably benefit the patent holder. Why do I, an American citizen, care whether GE (an American company) or Siemens (a German company) owns a particular patent? Either way, if I'm to directly benefit, it will be from buying a product at market price from the corporation. I can buy from Siemens just as easily as I can from GE, and Siemens is as happy to sell to me as to a German citizen.
  • jrship
    Sweet. Thanks to "new growth theory" and other trendy ideas from economics we need neither innovate nor produce. I'm thinking of trying this "free rider" strategy out personally. I'll just leave all the innovatin' and producin' to the young upstarts and go-getters. Suckas!!

    Errrrm. Any suckas want to lend me a few bucks. I'm out of weed and the newest version of my favorite video game just came out.

    I kid, but I really don't see how the existence of some positive externalities from third party innovation removes the need to even try to be competitive. There's something missing in your argument. The positive externalities might be canceled by the lost opportunity at even greater gains to be had through one's own future innovation/productivity. I'm no expert on "new growth theory" but there does seem to be somewhat of a historical case that innovation is generally a good thing for the wealth of nations.
  • TracyW
    jrship - what are you talking about? Why don't you need to produce?

    Let's compare four hypothetical worlds:
    1. You innovate and produce. No one else lifts a finger, thus you are number 1 in the world for innvotion and production.
    2. Every single person, including you, innovates and produces to the best of their ability (in the case of people in comas this is not much). Some of them are better at it than you so you are not the world's best anymore.
    4. Most people, including you, innovate and produces to some extent. Some of them are better at it than you so you are somewhere towards the top of the pack, but not the best.
    4. Everyone but you innovates and produces to the best of their ability. You sit back and do nothing, being the world last in terms of innovation and production.

    Will Wilkinson's point is that even though in the first world you are the world leader in innovation and production, you still would be better off in the second and third worlds, where you can gain from everyone else's innovation and production.

    It is even possible that you might be better off in the fourth world than you are in the first, as people might divert resources towards supporting you in more luxury than you could achieve by your single-handed efforts. But that's not Will's point.
  • jrship
    I take people, myself included, who use rhetoric like "falling behind in the renewables race" not as saying its bad when others innovate but that its bad when others innovate and we don't. Maybe there's just some mis-communication going on here, but I agree that the best world is one where everyone is getting after it. I don't think a little competitive national pride is really such a bad thing, but maybe I'm missing the point. Anyhow, I like the idea of ending the subsidy of free waste disposal for fossil fuel energy production and creating some incentives for investment in renewables; I think that libertarians who aren't in the grips of the climate conspiracy theory agree on the first point. Where we disagree is whether creating some further incentives gets us from your world 4 to your world 1.
  • The institutions that attract human capital and encourage innovation also encourage a high level of productivity and economic activity generally.
  • Name
    You are dim.
  • lhhunt
    Does it make a difference if we have internationally enforced intellectual property laws that give the originators of technologies ownership of these new technologies. That would seem to mean that these new ideas are no longer public goods and that free riding is impossible. Just askin'.
  • nickbacklash
    Worth noting though that, according to a fairly quietly released OECD study, state R&D subsidies don't make any net contribution to technological innovation, explained in this talk by Terence Kealey: http://oxlib.blogspot.com/2009/05/myth-of-scien...

    Science is not a standard public good. Not that this invalidates your wider point, there is just an even better reason for not investing in R&D.
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