The latest EconTalk is Taleb on the crisis. Lots of insight here on a very wide array of topics, including why visiting the Temple of Apollo was good for your health. But mainly, many interesting thoughts on thinking about uncertainty.
Taleb on the crisis
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Very good. From my limited perspective it appears the problem orginated when government introduced implicit safeguards against risk and financial institutions foolishly used these incentives to take on more and more risk because the upside seemed enormous while the downside seemed to be covered by government. Had capitalism been left to punish foolishness, as Taleb states, irrationally exuberant risks would have been cleansed by the market, and the wise companies would have won the competition. In a real sense government intervention caused a problem that may not have materialized, because if companies hadn't have held the idea that government would provide a soft landing if things went awry, they would most likely have been more careful with risks to start with.
Taleb attributes "the Harry Potter effect" to technological innovation, without ever mentioning copyright. Our favorite author, Russ, never mentions copyright in this context either, but the effect is clearly a consequence of copyright, interacting with technological innovation, not simply or even primarily a consequence of the technology.
The internet also has people around the world listening to Lizzie Driver's excellent LibriVox recording of Gulliver's Travels, but it doesn't thereby entitle Lizzie or any descendant of Jonathon Swift to build a castle, because Swift's copyright expired centuries ago, and Lizzie doesn't claim copyrights to her rendition.
We'll never know how many people would have read Rowling's work with different copyright statutes or not copyright statute or whether she would have written anything at all, but we do know that Lizzie spent many, many hours recording Gulliver's Travels without any expectation of copyright, and we also know that many people similarly spend many, many hours writing posts for this forum, more than I like to admit, so attributing the Harry Potter Effect (the income concentrating economic phenomenon) to technology rather than statute is not sensible.
Copyrights have generated greater and greater rewards in rare instances as a consequence of technology. The internet is not the most potent force driving this change, and it could even be a counterforce, but the change has occurred.
The greater and greater rewards in rare instances generated by this forcible propriety does create incentives to take greater and greater risks to profit from one of these rare, Black Swan events.
More to Taleb's point, if these rare events are Black Swans (with a fat tailed distribution of investment yields), diversification (averaging many of the investments) does not lower the risk.
In other words, betting on the next J. K. Rowling is very risky. We all understand this risk. Betting on a hundred authors who might be the next Rowling, hoping to recoup all of the investment from only a few of the bets, is not less risky.
This futility of diversification is counterintuitive, because we're led to believe that the central limit theorem is an ironclad law of finance, but it's not. It's not even a law of probability distributions. It's only a theorem applicable to particular distributions. The law of large numbers is a law of probability distributions, but this law says nothing about averages tending toward a mean value.
Russ,
I have a suggestion for a new Econtalk: I really like Frederic Mishkin of Columbia University.
He is, of course, the author of a famous expert, and expert on monetary policy, co-author with Bernanke on inflation targeting and he just published a new book about monetary policy.
Thanks!
Totally agree with Martin. The whole IP thing distorts markets, stifles innovation.
I agree with Pingry on Dr. Mishkin. He is a frequent guest on CNBC and would probably welcome the opportunity to converse with another accomplished academic (take a bow Russ) on all things monetary theory.
Again, we don't know how much intellectual property encourages or stifles innovation on balance, because we have no world without IP to compare with the world with IP; however, we do know that IP is a forcible imposition.
When I buy a copy of a Harry Potter story, I'm not simply buying the product of J. K. Rowling's creativity. I'm buying the product of many people's creativity, from book binders to truck drivers. J. K. Rowling receives the lion's share of the total revenue, because she is entitled to it.
When I write "entitled to it", I'm not passing any moral judgment. I'm only stating a statutory fact. Welfare recipients are also entitled to their benefits, whether or not I believe that a particular welfare program is productive or counterproductive.
Without IP or with different IP statutes (20 year copyrights rather that 120 year copyrights for example), authors might have less money, and bookbinders might have more. Whether we call this consequence of the statutory variation "good" or "bad" is irrelevant to my point.
My point is that the variation in wealth (or "marginal value") attributable to IP is not simply a product of the labor of authors. It's a product of statesmen establishing and enforcing intellectual property rights. That's just the fact of the matter.
And I don't oppose copyrights in general, although I do advocate reforms in copyright. I most advocate reforms in copyright most directly affecting me, i.e. copyrights for computer software source codes. I'd like these copyrights to be far less restrictive, of much shorter duration for example, and I write software for a living. Most people who write software for a living agree with me in my experience.
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