As the country uncertainly readies itself for another in our periodic series of national IQ tests, with dubious prospects in the offing, we've been privileged to hear an outpouring of all sorts of malarkey from the GOP and their wholly owned subsidiaries. Much of it is thrown against the wall just to see what sticks. Per usual, we get to hear how conservative principles will re-establish historic growth rates, producing a rising tide that will lift even the meanest of boats. (This is likely to be literally true in coastal cities in the coming decades, but not in the way they mean it.) There's the usual garage about returning to the gold standard, a feature of many GOP state party platforms; in addition to the Pauls and other known point sources, we have a goofy GOP Senate candidate in New Jersey making it a central feature of his campaign. The might find the history of gold in the twentieth century leading up to Bretton Woods, and the aftermath that eventually forced that arch socialist Richard Nixon to pull the plug on gold, enlightening.
An Amusing Aside: the Gold Standard
All the gold ever mined on this earth would fit into a cube a bit over 20 meters on a side, about 160,000 tons or six billion ounces. Most of it is still available, and the world adds 2500 to 4000 tons a year from mining. The vast majority of gold is used in jewelry or hoarded as an investment. Losses are small compared to production, so the gold supply grows slowly. Historically the price of gold increases roughly in tune with the world’s wealth. This is due to the fact that the price of gold is set by a market that values it not as an industrial commodity, but as Magic Natural Money (MNM). Gold’s industrial uses are in fact suppressed by its irrational use as a currency base by intentional primitives. The MNM price of gold fluctuates between $1500 and $2000 an ounce, so all the gold in the world is worth around ten trillion dollars. In comparison, the land area of the US is around 2.3 billion acres. The value of the unimproved land varies greatly; most of the deserts and swamps are of low value, while vast expanses of farmlands, shore, river and lakefront, and areas with mineral resources have special value. A reasonable guess for the average undeveloped value of the property might be $1,000 acre. Does anyone really believe that all the gold in the world has more intrinsic value than the whole United States?
Imagine what would happen if the value of all the stuff in the US increased by a factor of 100! There wouldn’t be much more gold in the world, and if it were the basis of our currency it would still have to be the backing for an economy orders of magnitude larger. Clearly, there would have to be an increase in the money supply to support economic activity (or else a continuous deflation that would make it impossible to borrow money). An increase in a gold backed money supply would require an Easter Island type concentration of national effort on gold production, with early diminishing returns as deposits were exhausted.
The successors of President Paul in the magic alternative universe where 3% annual growth is made possible by a gold standard would be forced to periodically recalibrate the worth of their currency by decreasing the amount of gold you could exchange for it. Given the quasi-biblical status of MNM, perhaps this would be triggered by scheduled revelations from an official MNM prophet, a kind of combination of Grover Norquist, Paul Volker and Joseph Smith. This kind of gold standard, in which the government periodically and predictably decreases the amount of gold you can get for a fixed amount in paper currency, is worse than no standard at all, because it encourages hoarding and further debases the industrial usefulness of gold. Your money would constantly grow along with the GNP (or better, with the GWP); this is much like what happens with gold investments now, except that under President Paul and his successors government intervention in the free trading of gold as a commodity would smooth out the fluctuations and make gold hoarding safe for everyone. If only the Dutch had thought of basing their currency on tulip bulbs.
Amazingly this has pretty much happened before. At the end of the gold standard real economic growth had outstripped gold production, causing currency shortages (one wonders what William Jennings Bryan would have thought of Ron Paul, and how evangelicals would have reacted to it). The US and other countries were under tremendous pressure because $32 an ounce gold was unrealistic and unsustainable (they had to buy gold at the true MNM market price and sell it at $32 an ounce), and their alternatives were essentially what President Paul’s successors would be: get off the gold standard, or set up a system in which the currency was openly and periodically devalued. We are long past the point where President Paul would be able to crucify mankind upon a cross of Magic Natural Money, even if he heard Ludwig’s voice telling him to do it.
Innovation
Of course, the increasing wealth of society isn’t built on having more of the same. George Jetson is better off than Fred Flintstone because he owns a personal flying saucer and has a robot that takes care of his house and cooks his meals, not because he owns a whole herd of dinosaurs or lives in Mammoth Cave or some other stone age McMansion. In the same way, we really are wealthier than the Americans of a hundred years ago, because among many other things we have cars, can fly in airplanes, have radio, television, computers and the whole range of electronic/electrical paraphernalia.
Most of all, we are much healthier and live much longer. In 1940, the average American’s life expectancy was only 63 years. We’ve gained two decades each since then. In 1900, the life expectancy was just over 47 years. How much is the near doubling of the human lifespan worth? (A lot to me. To paraphrase Tom Lehrer, it is a sobering thought that by the time Mozart was my age he’d been dead for twenty years.) This increased life span has come about largely because of increased biomedical knowledge and the availability of really good new stuff.
So even though we don’t live in the Biltmore, in many ways the typical middle class American is much better off than the Vanderbilts or Rockefellers of a century ago. How did we become so well off? Neoclassicists and Endogenists would, through different representations, point to innovation.
The predecessor to the internal combustion engine as the prime mover was the steam engine. A toy steam turbine was invented by Hero of Alexandria during the Roman period, but although others designed rotary steam engines during the intervening millennia no practical use was made until around 1700, when Somerset, Savery, Papin and Newcomen eventually resulted in widespread use of stationery steam engines for pumping water and running mills. The first piston engines were very inefficient and had limited practical applications; they ran at low pressure, and the power stroke, driven by condensation, was limited by atmospheric pressure.
The problem of engine inefficiency was treated by a number of physicists, including Rankine and Carnot. High pressure engines and other improvements (e.g., by Watt, Trevithick, and Evans) had greatly improved efficiency, but the invention of thermodynamics was largely carried out to allow improved engine design. It worked.
Internal combustion engines had already been invented; the first designs were strictly analogous to steam engines, and were horribly inefficient. Thermodynamics made it clear what the problem was; the fuel mixture was taken in as the piston began to move down, valves closed, and a spark fired the charge to drive the piston on the second half of the down stroke. Without compression of the fuel-air mixture, high temperatures could never be generated, and the efficiency could never be acceptable. Introduction of a compression stroke and the resulting four stroke Otto cycle fixed the problem, and allowed the development of the automobile industry around internal combustion engines and oil. Electric cars might eventually have become more practical, but battery technology could not have developed far enough to produce fully capable automobiles.
The development of the ‘old tech’ electromechanical industries has much in common with the development of engines and automobiles. The basic work of Joule, Henry, Franklin, Volta, Ampere, Faraday, and many others led to the explosion of invention in the late nineteenth and early twentieth centuries. Edison is the celebrated archetype of the early old-tech inventor, and the early GE was his corporate vehicle for the proliferation of products based on his ideas. The second stage of this industry is represented by the rise of engineer-mathematicians who were responsible for developments in the next, more sophisticated phase of technology; de Forest, Westinghouse, Nyquist, and Wiener are examples of leading figures who drove developments in this phase. The developments in this phase had little in common with the invention of the cotton gin, or even the telegraph and telephone. Electronics required much more sophisticated mathematics and more advanced approach to development.
The ante was raised again during WWII. The war and the cold war that followed it produced a striking leap forward in technology fueled by a river of government funding. Early in the process the great corporate labs of the mid twentieth century made seminal contributions. The invention of the transistor by the ‘team’ (they hated each other) of Shockley, Bardeen and Brattain at Bell labs made modern electronics possible by immediately reducing the size and heat generation of vacuum tube circuits by two orders of magnitude. Electronics became portable, cheap, and reliable. A decade later Kilby, working at Texas Instruments, developed a workable integrated circuit with many transistors on a chip. These developments and others (e.g., a tip of the hat to Fairchild is in order) made computers and modern electronics possible.
This was a watershed in many ways. Any bright kid with a simple glass blowing rig, a vacuum pump, and a soldering iron can make vacuum tubes that work. Development of integrated circuits, on the other hand, is the province of gigantic corporations and university-government consortia that have resources far beyond those of a basement inventor. When listening to pundits discuss how Steve Jobs and Bill Gates transformed the world, it’s a good idea to take a few grains of salt with the applesauce being spooned out. Jobs, Gates, and many others certainly made contributions to the wealth of the world, but the garage inventions of Woz that Jobs marketed were based on Woz’s ability to arrange cheap, reliable, powerful and commercially available IC chips to produce a capable, cheap and simple computer. Microsoft was born out of the government’s decision to prevent IBM from making PCs and also selling the software for them; ironically, the government feared a monopoly, and in its finite wisdom created Microsoft.
The development of the pharmaceutical and biotech industry followed a similar arc. The point is simple: fundamental innovation is still happening, but it isn’t automatic and long ago became too expensive for tinkerers to do on their own, although talented people can still turn new developments into products that the original discoverers never imagined. It becomes more expensive to innovate every year, because low hanging fruit has been picked and the cutting edge of development is further from street level. At this point, the great corporate labs have been for the most part been shut down or diminished and diverted to product development. It’s too expensive to do fundamental innovation, and so this has become the province of universities and government labs. Of course, ‘pro-growth conservatives’ are loath to fund them, perhaps fearing that the Rapture will occur before the investment will come to fruition. Waste not, want not.
Innovation on the level of products like personal computers, the iPOD, cell phones, and the whole emerging palette of personal electronics gets a lot of gee whiz attention from the public and from the press, who would lead you to believe that much of the modern world emerged fully formed from the nimble brains of Jobs & Gates with a maybe a bit of help from a few close associates. While taking nothing away from this kind of technological entrepreneur, it’s worth pointing out that there is lot less innovation in the progression from earlier digital-capable cell phones to the iPhone than there was in the invention of the cell phone, and that this was a much smaller increment than the inventions of chips, ICs, transistors etc. that enabled the whole progression. We are living off the more fundamental inventions of people who worked half a century ago. They depended on the fundamental discoveries of previous workers.
Assuming for the moment that growth is good, we might expect that our society would arrange things to encourage and reward innovation. This ignores the perfect magic angle spinning catch-22 symmetry of the two part golden rule that governs ultra-capitalist societies:
1) He who has the gold makes the rules.
2) He who makes the rules gets the gold.
Regulations and tax codes are not constructed by a benevolent and expert council that dispassionately considers the needs of society, or assembled by a committee that rationally plans a strategy to enhance growth. Instead, they are cobbled together by a patchwork of legislatures and agencies that considers the impression they are making on the folks (i.e., voters and big contributors) back home, and weighs the favor of fellow log-rollers, party bosses and patrons (i.e., big contributors) before they consider whether policies actually work. If this seems cynical, it is borne of direct experience. I’ve had more than one conversation with federal and state legislators who responded to advice I gave by admitting that it would work, but that they could never even propose it because it would be opposed by those groups.
So instead of a regulatory approach and a tax structure that favors innovation, we have a structure that favors money and voting blocks. We reward all sorts of questionable behavior far more than we reward innovation. We spend huge amounts of politically motivated money on agribusiness subsidies, give ridiculous breaks to mature industries who are anti-innovation, and then smile and nod at monetarist cant about how to ‘grow the economy’, as if it were the lawn and all you had to do was sprinkle it with a bit of turf-builder each spring and water it once a week.
I’ve had numerous chances to observe the fate of innovators in the US economy. First of all, in most cases there is absolutely no interest in developing an idea that is more than five years from a product, so the widespread idea that industries or investors fund basic work is nonsense. In most cases they are reluctant to fund development until an advanced stage has been reached. If an inventor takes a product far enough to get venture capital funding, at each stage they lose more control to managers that the investors insist on to run enterprise, and their stake in the nascent company is diluted by each subsequent round of funding. Of course this should be expected, but what is less obvious is that much of the subsequent funding isn’t used to develop the original idea.
The strategy of investors and managers is not to develop a company that sells a product, but to develop the company as the product. Subsequent investments are used to purchase the rights to unrelated technology with the goal of constructing a company profile that contains multiple products in the developmental pipeline at different stages of development. This allows the original investors to cash out by selling the company. The original project has often been de-emphasized or discarded by this point. The goal isn’t long-term innovation, or even development of a viable product, although that would be welcome. The goal is to create an attractive profile for the next round of investors. Venture capital people appear to make a lot of money. The problem is that this is a lousy way to innovate. Most people who are capable of breakthrough ideas have little incentive to commercialize them.
When you hear the call to symbolically economize on the National Science Foundation budget, about 6.8 billion dollars out of a federal budget of 3.8 trillion, remember that this is the primary supporter of the basic research that corporations dropped over the last few decades. Whacking away at this or the energy R&D budget of the DOE, or dumping the basic research the National Institutes of Health supports into translational medicine, won’t hurt the potential for economic growth much for the next five years. Twenty or thirty years from now, however, the pipeline will be empty. Innovation is hard, not easy, and getting harder. Without it the zero growth society will come sooner rather than later.
I compared the effects of a product-oriented innovator like Steve Jobs with the more fundamental contributions of others, but all these people produced real innovation. After the collapse of the financial markets in 2008, we were treated to the spectacle of conservative congressmen, nearly in tears, pleading not to rush to regulation, which would stifle the outpouring of creative financial instruments. I don’t totally discount the possibility of creative financial instruments with real utility, particularly as life spans increase, connectivity expands, and the world changes in ways we can’t predict. It is pretty clear to me, however, that many things that pass for creativity and innovation are new names for fraud.
Be careful of the name game, the inappropriate appropriation of terminology from one set of concepts to another. During the Great Big Republican Debates and Traveling Medicine Show I was struck by the spirited defense from some quarters of Bain Capital, featuring the all but obligatory reanimation of that shambling Golem, creative destruction. Originally, of course, this was Karl Marx’ idea; the Marx and Engles analysis of capitalist wealth creation included it as an essential component of capitalist growth. Shumpeter’s analyses of growth stressed innovation, and his version of creative destruction new industries replaced old ones (e.g., the buggy whip factory in your town is probably out of business).
Now we find that Marxist rhetoric has been taken up by the ultra-conservatives, and creative destruction is used to describe downsizing to improve profits and even strip and sell corporate raiding. (You need to work on your dialectic a bit more, Komerads.) To Bungaists with such a world view, Mitt Romney and Bain are ‘innovators’ who can look Steve Jobs or Thomas Edison in the eye. David Perdue is an agent of creative destruction, clearing the way with efficient outsourcing operations for the future low employment America to spread like a fiscally sound fungus across the face of our great land. Look for the ‘insurance industry’ to open a new plant in your town soon.