Reports

ICT Innovation Policy in China: A Review

July 21, 2014
| Reports

China is not only a producer of manufactured goods, but it is increasingly a nexus for technological innovation as a growing share of home grown, high-tech companies compete in the global marketplace. The Chinese government sees information and communications technology (ICT) both as a key catalyst for China’s transition from a manufacturing to a knowledge-based economy and as a positive influence in boosting across the board productivity and overall quality of life in China. That is why a decade ago China designated “informatization,” the adoption and enhancement of ICT in every aspect of the economy and society, as a central facet of the nation’s economic modernization strategy.

This report reviews the long-term, mid-term and industry-specific ICT policies China is utilizing to implement informatization and improve its overall international economic competitiveness. This includes the frameworks to enhance innovation and development in the “Internet of Things,” cloud computing and data innovation.

The report concludes by noting that while Chinese policy is moving in the right direction, the nation still has a long way to go to match the ICT policy framework of the United States or Europe. This would include creating policies to attract, rather than compel, ICT foreign direct investment, while reforming existing regulations and requirements to ensure domestic and foreign firms are operating on a level playing field.

Understanding the U.S. National Innovation System

June 30, 2014
| Reports

The conventional view of innovation is that it is something that just takes place idiosyncratically in “Silicon Valley garages” and R&D laboratories. But in fact, innovation in any nation is best understood as being embedded in a national innovation system (NIS). Just as innovation is more than science and technology, an innovation system is more than those elements directly related to the promotion of science and technology. Rather, it also includes all economic, political and other social institutions affecting innovation (e.g., a nation’s financial system; organization of private firms; the pre-university educational system; labor markets; culture, regulatory policies and institutions, etc.). Indeed, as Christopher Freeman defined it, a national innovation system is “the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies.”

This report identifies the broad elements that make up a national innovation system, including a description of the innovation success triangle, which measures the business environment, regulatory environment, and innovation environment of a nation, and is used to predict the success of an innovation system in promoting technological development and economic growth. It then uses this framework to analyze the U.S. national innovation system and assess the strengths and weaknesses of individual components  and whether those components  are improving, stable or deteriorating relative to our competitors. Unfortunately, in many areas the U.S. national innovation system falls behind our global competitors, hampering our ability to foster the innovation that is imperative for success in the 21st century economy.

As nations compete to win the global innovation race, the effectiveness of their national innovation systems will be a key factor in deciding the winners and the losers. Thus, the challenge for the United States going forward is whether it can make the needed changes to its innovation system to keep up with the international innovation leaders and remain a key player in the innovation economy. The future health of our nation will depend on the answer.

Setting the Record Straight: De-Identification Does Work

June 16, 2014
| Reports

In the coming years, analytics will offer an enormous opportunity to generate economic and social value from data. But much of the success of data analytics will depend on the ability to ensure that individuals’ privacy is respected. One of the most effective ways in which to do this is through strong “de-identification” of the data – in essence, storing and sharing the data without revealing the identity of the individuals involved.

A number of researchers have been investigating techniques to re-identify de-identified datasets. Unfortunately, some commentators have misconstrued their findings to suggest that de-identification is ineffective. Contrary to what misleading headlines and pronouncements in the media almost regularly suggest, datasets containing personal information may be de-identified in a manner that minimizes the risk of re-identification, often while maintaining a high level of data quality.

Despite previous efforts to dispel the myth that datasets cannot be reliably de-identified no matter the methods employed to de-identify the data, this view continues to be promulgated. It is increasingly apparent that one of the reasons for the staying power of this myth is not factual inaccuracies or errors within the primary literature, but rather a tendency on the part of commentators on that literature to overstate the findings. While nothing is perfect, the risk of re-identification of individuals from properly de-identified data is significantly lower than indicated by commentators on the primary literature.

At the same time, advancements in data analytics are unlocking opportunities to use de-identified datasets in ways never before possible. Where appropriate safeguards exist, the evidence-based insights and innovations made possible through such analysis create substantial social and economic benefits. However, the continued lack of trust in de-identification and focus on re-identification risks may make data custodians less inclined to provide researchers with access to much needed information, even if it has been strongly de-identified; or worse, to believe that they should not waste their time even attempting to de-identify personal information before making it available for secondary research purposes. This could have a highly negative impact on the availability of de-identified information for potentially beneficial secondary uses. 

The 2014 State New Economy Index

June 11, 2014
| Reports

The conventional view of the U.S. economy, and of state economies, is as static entities which change principally in size (growing in normal times and contracting during recessions). But in fact, state economies are constantly evolving complex ecosystems. Indeed, U.S. state economies of 2014 are not just larger but different than the state economies of 2013. On any given day this year each state will on average be home to businesses that receive 12 patents, release nine new products and introduce nine new production processes, while about 32 firms will go out of business and another 32 will be launched. Firms in some industries will get bigger (the average number of workers in non-store retailers—e.g., the Amazon.coms of the world—grew 0.03 percent every day in 2013) while some will get smaller (the average size of data processing, hosting, and related services shrank 0.07 percent every day in 2013, despite the emergence of cloud computing). Understanding that we are dealing with evolving rather than static state economies has significant implications for state economic policy.

The challenge for state economic development is to encourage evolution. This means helping the states’ traded sector companies to both win in advanced technology sectors and to slow the loss of more mature industries to lower cost locations. But evolution also means that government should not only not erect barriers to natural evolutionary loss (e.g., the loss of output of some firms and industries coming from disruptive technological change), it should actively remove barriers to such disruption. This means reducing the regulation and other protections that incumbents (big or small) face vis-à-vis more entrepreneurial (big or small) innovators. And it means both encouraging innovation through smart state technology-based economic development strategies and programs while also ensuring a tax and regulatory environment that supports state competitive advantage. In short, to be well positioned to drive economic evolution, state economies need to be firmly grounded in what can be called “New Economy” success factors, which assess states’ fundamental capacities to successfully navigate the shoals of economic evolution.

The 2014 State New Economy Index builds on six prior State New Economy Indexes published in 1999, 2002, 2007, 2008, 2010 and 2012. Overall, the report uses 25 indicators broken up into five key areas that best capture what is new about the New Economy:

  1. Knowledge Jobs
  2. Globalization
  3. Economic Dynamism
  4. The Digital Economy
  5. Innovation Capacity

The state that is farthest along on the path to the New Economy is Massachusetts, as it has been in all previous editions of the State New Economy Index. Boasting a concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard, Massachusetts survived the early 2000s downturn and was less hard hit than the nation as a whole during the Great Recession in terms of job growth and per-capita income growth. As in the 2012 Index, Massachusetts shares the top quartile with Delaware, California, Washington, and Maryland. Second-place Delaware is perhaps the most globalized of states, with business-friendly corporate law that attracts both domestic and foreign companies and supports a high-wage traded service sector. The state has moved up four ranks since 2010, driven by top rankings in high-wage traded services, foreign direct investment, and industry investment in R&D. Third-ranked California thrives on innovation capacity, due in no small part to Silicon Valley and high-tech clusters in Southern California. California still dominates in venture capital, receiving 55 percent of U.S. venture investments, and also scores extremely well across the board on R&D, patents, entrepreneurship and skilled workforce indicators.  Washington State, in fourth place, ranks in the top five due not only to its strength in software and aviation, but also because of the entrepreneurial activity that has developed in the Puget Sound region and the widespread use of digital technologies by all sectors. Maryland and Virginia, ranked fifth and seventh respectfully, have realized high rankings primarily due to high concentrations of knowledge workers, many employed with the federal government or related contractors in the suburbs of Washington, D.C. Colorado, in sixth place, maintains a highly dynamic economy along with the second-most highly educated workforce in the country. The state has become a hotbed for high-tech innovation in the middle of the country and scores well on entrepreneurship and knowledge-employment indicators. Eighth-place Connecticut excels in traded services, aided by a highly educated workforce, high levels of foreign direct investment, and excellent broadband infrastructure. The state also enjoys robust R&D investment and high scores in inventor patents and fast-growing firms. Ninth-place Utah ranks first in economic dynamism. Moreover, its high-tech manufacturing cluster centered on Salt Lake City and Provo supports its second-place ranking in manufacturing value added. New Jersey’s strong pharmaceutical industry, coupled with a high-tech agglomeration around Princeton, an advanced services sector in Northern New Jersey, and high levels of foreign direct investment, helps put it in tenth place.

The two states whose economies have lagged the most in making the transition to the New Economy are Mississippi and West Virginia. Oklahoma, Arkansas, Louisiana, Wyoming, Kentucky, Hawaii, South Dakota and Alabama round out the bottom 10. Historically, the economies of many of these states depended on natural resources, on tourism, or on mass-production manufacturing, and relied on low costs rather than innovative capacity to gain a competitive advantage. In the New Economy, however, innovative capacity (derived through universities, R&D investments, scientists and engineers, highly skilled workers, and entrepreneurial capabilities) is increasingly the driver of competitive success, while states only offering low costs are being undercut by cheaper producers abroad. Regionally, the New Economy has taken hold most strongly in the Northeast, the mid-Atlantic, the Mountain West, and the Pacific regions.

 

Overall Ranking:  
   
1. Massachusetts18. Michigan35. Nebraska
2. Delaware19. Rhode Island36. North Dakota
3. California20. Texas37. Iowa
4. Washington        21. Georgia38. Indiana
5. Maryland22. Pennsylvania39. Montana
6. Colorado23. North Carolina40. Tennessee
7. Virginia24. Idaho41. Alabama
8. Connecticut25. Florida42. South Dakota
9. Utah      26. New Mexico      43. Hawaii 
10. New Jersey27. Nevada44. Kentucky
11. New Hampshire28. Maine45. Wyoming
12. New York29. Ohio46. Louisiana
13. Minnesota30. Wisconsin47. Arkansas
14. Vermont31. Kansas48. Oklahoma
15. Oregon32. Alaska49. West Virginia
16. Illinois33. Missouri50. Mississippi
17. Arizona34. South Carolina 
   

States that score highly on the State New Economy Index are best able to face the challenges brought on by the New Economy transformation, while lower-scoring states have significant ground to make up. While low-scoring states would perhaps benefit most from implementing comprehensive and cogent innovation strategies, even the high-scoring states have room for improvement. Indeed, all of the states, and perhaps most importantly, the federal government, need innovation strategies in order to compete in the New Economy. Successful strategies will incentivize, among other things: having a workforce and jobs based on higher skills; strong global connections; dynamic firms, including strong, high-growth startups, industries, and individuals embracing digital technologies; and strong capabilities in technological innovation.

Other nations and sub-national governments have shown increased interest in technology-based economic development (TBED). With the rise of the Internet, regions around the globe can now easily and quickly learn from each other and pick from best-in-class policies and programs to institute at home, often with appropriate customization to fit local conditions and policy frameworks. U.S. state and local economic development officials would be well advised to track what their competitors are doing abroad, for there are many interesting and effective models for spurring TBED that may be adopted within the United States, especially in four key areas: 1) economic development analysis and strategy; 2) financial incentives for innovation; 3) education reform; 4) and startup support. Adopting these policies would help reconfirm the United States’ position as a global innovation leader in this period of intense evolutionary competition.

Download the 2014 Data Files:

Download the 2014 Indicator Ranks (CSV).
Download the 2014 Indicator Scores (CSV).
Download the 2014 Master Table (PDF).

Download the 2014 Indicator Ranks and Scores (XLSX).
Download the 2014 Master Table (PDF).

ITIF Summer Reading List 2014

June 9, 2014
| Reports

To assist those looking for good beach reading, ITIF presents its annual summer innovation policy reading list. The list identifies 14 recent books that do the best job of informing the innovation and competitiveness policy debates. To also save readers time and money, the list also includes books ITIF does not recommend.

Books We Recommend (Alphabetical by Author’s Last Name)

Uncharted: Big Data as a Lens on Human Culture by Erez Aiden and Jean-Baptiste Michel

While many of the most important big data applications, such as numerical weather prediction and high-throughput genomic analysis may be esoteric to much of the public, human culture can serve as an immediate and accessible example of big data's power and breadth of applicability. Aiden and Michel's book does just that. Inspired by their research as applied mathematics graduate students at Harvard, they detail the emerging discipline of "culturomics," the attempt to address sociological questions through quantitative analysis. In addition to its insights about the human condition, from the way language evolves to the ebbs and flows of different research disciplines, culturomics has long-term implications for economics, education, and the law. Aiden and Michel situate big data as a crucial tool for studying human culture and attitudes, and in doing so give another example of how big data will touch all aspects of human life.

Innovation Economics: The Race for Global Advantage (Paperback Edition) by Robert Atkinson and Stephen Ezell

Yes, we plead guilty of self-promotion. This book, written by ITIF President Robert Atkinson and Senior Analyst Stephen Ezell, was released in paperback in 2014. McKinsey Director Emeritus Lenny Mendonca describes the book as follows: “As a long-time analyst of the trends shaping the global economy, I am struck by the increasing number of economic and political leaders that do not grasp how serious the structural economic problems facing America are. I hope they read Innovation Economics. It ‘speaks truth power’ with candor, reason and wit and offers fresh thinking and a path forward. Rob Atkinson and Stephen Ezell have been making important contributions and better ideas about economic policy for years. Their new book is eye-opening and alarming and arrives at a critical time.”

Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

Tyler Cowen’s e-book generated a great deal of press regarding America’s future economic health and the distribution of wealth. Cowen believes a large share of income will continue to go to a relatively small elite of educated people as middle class jobs continue to erode due to the loss of industrial competitiveness. Technology will make it easier for anyone to break into this elite, but Cowen is not optimistic about the chances for those regions and individuals that either cannot or do not add value to capital. If this fraction of the population is to enjoy rising living standards, it will have to depend upon explicit public policy rather than the value they are able to create in the private market. While the book does make some far reaching assumptions common to the techno-utopians, it does provide a needed assessment of the far reaching implications of our continuously stagnant economy. 

The Global War for Internet Governance by Laura DeNardis

With the recently proposed transition of U.S. oversight of the IANA function to ICANN, Internet governance is a hot topic these days. For those new to the issue, this book is an accessible (and timely) overview of the major debates on Internet policy. DeNardis takes an inclusive view of how both state and non-state actors contribute to Internet governance. Over the course of the book, she introduces over one hundred technological or institutional control points and discusses how each may be used to govern at least one aspect of the Internet. In general, the book’s tone is fairly neutral, and the author focuses more on laying out the facts than critically examining different arguments.

Big Bang Disruption: Strategy in the Age of Devastating Innovation by Larry Downes and Paul Nunes

Business books about corporate innovation tend to be a dime a dozen, but Downes and Nunes’ offering provides useful, practical, and accessible insights and recommendations for practitioners of corporate innovation. While those looking for a well-developed theory of corporate innovation, a la Clayton Christensen’s The Innovator’s Dilemma or The Innovator’s Solution may be disappointed, the case studies and analysis presented in the book effectively convey the accelerated pace of innovation in the modern business environment and the urgency and alacrity enterprises must display. While unfortunately the book is a bit too prone to hyping the techno-exponentialism that ITIF has previously lamented, there is little doubt that emerging technologies—particularly information and communications technologies (ICTs)—have directly accelerated rates of innovation in a range of downstream industries well beyond the ICT sector itself. For example, computer-aided design [CAD] technologies have played a major role in reducing design cycles for everything from vehicles, buildings, medical devices, and semiconductors themselves from years to a matter of months. The authors are also spot-on to argue that this means that all businesses must now innovate at the pace established by the information technology industry.

In summary, while Big Bang Disruption isn’t flawless, it’s a fairly quick read that inspires readers to think about the challenges and new approaches needed to bring innovation to their enterprises and industries, effectively conveying the urgent pace of modern corporate competition and the need to innovate rapidly yet deliberately.

Open Data Now: The Secret to Hot Startups, Smart Investing, Savvy Marketing, and Fast Innovation by Joel Gurin

Open data went from a niche topic among a few computer scientists and activists to a subject of national debate and a presidential executive order in a few short years. This is due in no small part to the work of open data evangelists like Gurin, a senior advisor at New York University's GovLab. This book is at once a primer on what open data is and how it can be used, as well as a call to action for government to embrace open data and make these applications more accessible. The book contains innumerable examples of present and future applications for open data, which are sure to prove inspiring for entrepreneurs, scientists, and tech companies alike, but the book’s real value will be in convincing policymakers that the demand for government data is massive and not to be ignored.

Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy by Usha Haley and George Haley

As ITIF previously noted in a post for The Breakthrough, this book is an essential read for American business leaders and trade policymakers. The Haleys argue that a vast system of subsidies to Chinese industries plays a more important role in their mercantilist policy than currency manipulation. This strategy largely results from a particular view of success: that technology acquisition provides a key goal in Chinese business operations, even at the expense of profits. But another possible explanation is China’s “shift strategy,” where growth is believed to come by shifting from low-productivity industries to high-productivity ones. Why does it matter? Chinese mercantilism has not only cost the United States a significant share of manufacturing job loss, but also has distorted the global location of and nature of production systems. The authors conclude by noting that the only real solution to the problem of Chinese mercantilism and massive industrial subsidies in particular, is for the world trading community to say enough is enough.

The Cure in the Code: How 20th Century Law is Undermining 21st Century Medicine by Peter Huber

Peter Huber is one of the nation’s best students of government regulation and technology. The Cure in the Code applies this expertise to the growing swell of information about the interaction of drugs and disease at the molecular level of individual patients. He concludes that the traditional approach to drug licensing is incapable of regulating new drug discoveries. Increasingly, the diseases that plague America depend on an intricate dance between the molecular makeup of an individual’s biome and a particular drug. The interactions can differ between patients, change within the same patient over time, and involve more than one molecular interaction. The most useful information will be generated by laboratory experiments to identify relevant biomarkers and an on-going process of trial and error by individual doctors treating individual patients. Luckily, computer science has developed the ability to collect and analyze the unprecedented amounts of data needed to tease out interactions that might previously have gone unnoticed. Unfortunately, FDA’s standard practice of double-blind clinical trials is increasingly incapable of keeping up with the science at an acceptable cost either in money or lives lost waiting for a cure. Anyone wanting to understand how medical science is progressing and what government needs to do to advance it should read this book.

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

Mariana Mazzucato’s The Entrepreneurial State is an ambitious book with an important goal: to turn the way we think about the government’s role in the economy on its head. Mazzucato argues that the state is an innovative, entrepreneurial actor in ways that the private sector cannot be, because only the state possesses the vision, resources, and long-term commitment necessary to facilitate large-scale innovation. The core of the book presents convincing evidence of this dynamic, the risk/reward tradeoffs faced by governments, taxpayers, and private-sector actors as well as what the implications of this system are for fairness and equality. All in all, this is a must-read book in the field of innovation policy—and indeed for anyone interested in political economy or income inequality.

Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change by Edmund Phelps

These days, it’s usually pretty easy to tell when reading a book on the economy what is the author’s political orientation. Conservatives praise markets and promote growth; liberals praise government and promote fairness. It’s in this context that Phelps’ Mass Flourishing is different and confusing, since we  couldn’t really identify his political orientation. What Phelps attempts to do is explain, in the broader sense, why some societies “flourish” in terms of both material wellbeing and the good life. He rightly points to innovation as the driver and indeed defines a modern economy as one “with a considerable degree of dynamism—that is the will and capacity and aspiration to innovate…and to leave aside current conditions and obstacles.” In other words, the willingness to take and embrace risks and organize government to support innovation, but for Phelps, all is not well. He argues that America has turned away from those values, increasingly preferring stasis and comfort, not dynamism and change. Phelps notes that as more and more Americans “became interested in making a quick buck,” they gravitated to wealth seeking sectors like finance, and not the innovation sectors that are necessary to promote economic health. Thus, he makes an important point that conservatives need to take to heart: making money and seeking wealth are not synonymous with a society that enjoys mass flourishing.

While this book is deeply insightful, we were in strong agreement with some and disagreement with other parts. When Phelps writes that mass flourishing depends on acceptance of risk and willingness to not protect incumbent or past businesses, we are in strong agreement. America seems increasingly less willing to “leave aside current conditions and obstacles.” But when he generalizes that most public efforts to support innovation have not been successful, we disagree. As ITIF has written, the U.S. government has played a key role in supporting the development of many of the most transformative technologies responsible for our mass flourishing Yet, all in all, this is an important book in helping to understand the path to revitalize American innovation.

Wealth and Power: China's Long March to the Twenty-first Century by Orville Schell and John Delury

Anyone who is interested in understanding the path of innovation and innovation economies in the 21st  century will have to pay attention to China. This new book, by two long-time China scholars, is a key resource for gaining a better understanding of the history of China’s economic and political development over the last 200 years and what it means for current global policy. One particularly interesting historical point is the discussion of the meeting between Lord Macartney, an emissary from Britain sent by King George III to provide the Chinese with gifts in the form of the latest in technology as a means to help open up trade relations. However, Emperor Qianlong, “dismissively informed him that the Qing Empire had no great need for England’s goods or inventions… ‘I have no use for your country’s manufacturers.’”

The authors go on to describe how the closure of the Chinese market to British exports (while Britain was running up a huge trade surplus in imported tea and silk) led the British to market opium to the Chinese in an effort to get them to buy something. The book seeks to understand the stop and start efforts of Chinese reform (opening up to the outside world and becoming more “democratic” and less imperial) through the lens of 11 key leaders in China, including Empress Dowager Cixi, Sun Yat-sen, Chaing Kai-shek, Mao, of course, and Deng Xiaoping. Their uniting theme is that reformers all shared a common goal: achieving both wealth and power for China, especially in an effort to restore national greatness after a “century of humiliation.” Clearly, China is still engaged in this task.

Just Say Yes: What I've Learned About Life, Luck, and the Pursuit of Opportunity by Bernard Schwartz

Just Say Yes is a compelling and very enjoyable read about the life and career of Bernard Schwartz, who among other titles was the Chairman and CEO of Loral Corporation, a leading defense and satellite company. The first part of the book details Mr. Schwartz's life, interesting in part because he was born during the Great Depression, so his business career spans the U.S. post-war environment, and through his experiences we get a window into how the U.S. economy evolved. While both the biographical life story and insights into management are fascinating, what is telling about this book is the ethos that Schwartz brought to business, something that he rightly complains is all too lacking in today’s short-termist driven business culture. Schwartz tells us how he ended up making a significant number of acquisitions to Loral and how in doing so, the company took great pains to not lay off workers, while also working to build value in the acquired companies, not strip it out in search of a fast buck.

The Next America: Boomers, Millennials, and the Looming Generational Showdown by Paul Taylor and the Pew Research Center

We are surrounded by change, but what does it all mean? For the last decade the Pew Research Center has been doing some of the best public polling in the world. Paul Taylor, who has overseen much of this work, puts the results of this and other research into a coordinated snapshot of how America is evolving. In separate chapters he describes how public life and opinion is changing on important issues such as marriage, the use of technology, immigration, finance and the role of government. Woven throughout this analysis is a discussion of the distinctive view of each generation of Americans, but especially the Baby Boomers and the Millennials. Overall Taylor paints a fairly optimistic view of the future clouded only by the unsustainability of the government’s commitment to the Baby Boomers, particularly in the form of unsustainable entitlement spending. The respective generations will eventually have to renegotiate this contract of spending in a way that is fair to all. Readers of this book will come away with a deep understanding of how the country is changing and the challenges before it.

Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom by Adam Thierer

Mercatus scholar Adam Theirer provides a succinct treatise on the merits of “permissionless innovation,” or the idea that policymakers should leave innovators free to create without first seeking their approval. This model of technological innovation serves as a stark contrast to the countervailing “precautionary principle”—the belief that innovators should be restrained until they can prove that they have sufficiently addressed risk—which underpins the thinking of many policymakers, particular in Europe. Theirer’s book is a compelling read, and one that is supremely relevant to a host of technology policy debates from drones to 3D printing to crypto currencies. Theirer does not dismiss risk associated with new technology, but rather shows how bottom-up solutions, such as self-regulation and social pressure, can be more useful than top-down tools, such as regulatory directives, at addressing the many facets of complex social problems. Overall, many will find this quick read a useful framework for thinking about many emerging policy issues.

Books We Do Not Recommend (Alphabetical by Author’s Last Name)

With a topic as complex as innovation and technology policy it is important to present a reasoned and realistic picture of the issues we face and the potential policy reforms to address our challenges. However, all too often pundits misrepresent the issues or drastically oversimplify the solutions. Below are some examples of a few recent publications that are better left on the shelf.

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee

This publication, which builds on an e-book we reviewed last year, is yet another example of the “innovation optimist” approach arguing that we are entering a “second machine age,” (following the Industrial Revolution) which is “doing for mental power…what the steam engine and its descendants did for muscle power. They’re allowing us to blow past previous limitations and taking us into new territory.” However, as we chronicled in a review for Issues in Science and Technology, the evidence does not warrant such utopianism. In fact, to reach the global income levels the authors predict, the world would need to maintain productivity growth of 25 percent per year for the next 25 years, a tough prospect given that the average over the last quarter century is 3.5 percent. Moreover, the authors’ continued fanning of the flames of neo-Luddite fears of wide-scale job loss from innovation are not borne out by history or analysis and encourage the public and policymakers to want to slow, rather than accelerate innovation. This is particularly troubling given the fact that the United States is in a race for global innovation advantage and significantly more high technology development, not less, is required to remain internationally competitive. ITIF further examined the issue of technology and job loss in a debate featuring Race Against the Machine co-author Andrew McAfee and ITIF President Rob Atkinson last year.

The Pirate Organization: Lessons from the Fringes of Capitalism by Rodolphe Durand and Jean-Philippe Vergne

There’s no way that a book with the title The Pirate Organization cannot make it on ITIF’s “do not read” list. Authored by two professors of business, this tome, surprisingly published by Harvard Business School Press, provides one more data point for the assertion that too many academics have left behind any semblance of scholarly objectivity. The authors argue that “piracy could very well be the driver of capitalism’s growth and evolution,” because pirates play a key role in challenging monopoly. Indeed, “today, cyber pirates are opposing the normalization of data sharing and the monopolistic control of digital space.” But how do they define monopoly? Do they mean the fact that Harvard Business Press is the only authorized producer of their book? Should anyone be able to get a free pirate version? 

In the authors’ view, digital pirates are populists fighting monopolies and oppressive states (like the U.S. government). “These pirate organizations stand up against the state and its accompanying legitimate corporations.” This is because “from the point of view of pirates code is a language that belongs to everyone.” For example, a music record on vinyl is private property since it is analogue and not digital code, but once  it is put into 1’s and 0’s, it becomes a free good, like air or water. At that point, pirate organizations represent “legitimate expropriation on behalf of a public cause.” Wow. We guess the millionaire Kim DotCom was going to donate his ill-gotten gains to pro-piracy groups like the Electronic Freedom Foundation. Reading this kind of anarchist nonsense really made us wish we had stolen a digital copy of the book.

The Myth of America’s Decline: Politics, Economics, and a Half Century of False Prophecies by Josef Joffe

One of the most important economic policy debates the United States should have is whether the U.S. economy is losing out in international competition. There are arguments to be made on both sides, with ITIF clearly arguing that we are losing ground. However, Joffe’s book is a disappointing contribution to this debate, for he relies on broad scale analysis which does not really answer this question. First, Joffee dismisses any present concerns about U.S. economic decline (what he dismissively calls Decline 5.0) by saying that there have been concerns in the past. True there have been,but what he fails to understand is that after many of these clarion calls of decline or potential decline, including after Sputnik (decline 1.0 and after the Japanese challenge (decline 4.0), the United States responded and took actions (increasing federal support for science, reforming the tax code, changing anti-trust law, enforcing trade laws, etc.) that were critical in enabling continued economic leadership. Today, the evidence that we will do the same is not as compelling, especially as scholars like Joffe dismiss any calls as the boy “crying wolf.”

The second major flaw with his analysis is that he compares the United States to other nations only on dollar denominated GDP measures. For example, he says that in 2012 the U.S. economy was three times the size of Japan. So what? Any comparative measure has to be about hourly productivity, not GDP, and about traded sector strength, not overall economy strength. He also dismisses the use of purchasing power parity (PPP) comparisons despite the fact that these are used by international organizations like the World Bank and the OECD to compare economic performance of nations. He doesn’t like PPP because it shows, as the World Bank has noted, that China is about to surpass the United States as the world’s largest economy. This flies in the face of Joffe’s argument that China’s economy is only half as large as America’s.

All in all, this is a disappointing analysis of a topic that is important to get right.

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

It’s become de rigueur for authors claiming to be futurists to extoll the coming technology wonders that are in store for us, painting a utopian (or depending on their view, dystopian) picture where technology proceeds exponentially and transforms the world. The latest entry to the techno-utopian club is Jeremy Rifkin’s Zero Marginal Cost Society. He argues that within less than 50 years, technology will have proceeded to the point where there will be virtually no more jobs, where the marginal cost of everything will be zero and where capitalism will cease to exist. Besides that not much will change.

He goes on to claim “’The Internet of Things’ is already boosting productivity to the point where the marginal cost of producing many goods and services is nearly zero, making them practically free. The result is corporate profits are beginning to dry up, property rights are weakening, and an economy based on scarcity is slowly giving way to an economy of abundance.” Not only will we not have any jobs, but we won’t have any businesses either, because when goods and services become free (because the marginal cost is zero) “profits dry up, the exchange of property in markets shuts down, and the capitalist system dies.”

Sounds like Marx’s The Communist Manifesto. Are we going to all be driving SUV’s and having our own private planes in this nirvana “co-op” world? Nope, because “the accumulation of wealth is an albatross… with each additional foray into this hedonistic fantasy brings more unhappiness, pulling them ever downward in vicious cycle of addiction from which there is no escape.” There are so many problems with this tome it’s hard to know where to start. So we won’t. Let us save you the time: Rifkin is wrong.

 

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Raising European Productivity Growth Through ICT

June 2, 2014
| Reports

Download Executive Summary.

Most commentary on Europe’s economy focuses on its precarious financial system and anemic employment recovery since the Great Recession. But Europe faces a challenge of equal or even greater magnitude that has received far less attention: lagging productivity. After a long period during which Europe was closing the productivity gap with the United States, since 1995 that gap has widened steadily and shows no signs of narrowing. If Europe is going to catch back up it must follow the same path that drove U.S. productivity growth: more ubiquitous adoption—as distinct from production—of information and communication technologies (ICTs) by all organizations (for-profit, nonprofit, and government) throughout the European economy.

Increasing productivity is the key way that countries can raise their per-capita income. It should not be surprising, then, that two decades of lackluster productivity growth have left many European companies uncompetitive, European incomes stagnant, and European government finances in turmoil. Only one EU-15 country, the relatively small Ireland, managed productivity growth rates that exceeded those of the United States in the two periods since 1995. Given the demographic challenges and increasing international competition that Europe faces in the coming decades, it is crucial that Europe find a way to reverse these growth trends.

The scholarly evidence strongly suggests that increased ICT adoption, and the transformative change it can bring to organizations, is a key piece of Europe’s productivity puzzle. ICT is a general purpose technology (GPT) that has wide-ranging effects throughout an entire economy, reshaping entire systems of production and distribution. Around two-thirds of U.S. total factor productivity growth between 1995 and 2004 was due to ICT, and ICT has contributed roughly one-third of growth since then. These gains are primarily due to the efficiencies of ICT capital, as well as associated complementarities and spillovers.

Compared to the United States, Europe has had far smaller productivity gains from ICT. Although the contribution of ICT varies between European countries—some countries have gained roughly as much from ICT as the United States while many others, including France and the Mediterranean countries, have benefited significantly less—overall Europe trails significantly behind. This variation in outcomes between countries along with variation at the industry and firm levels makes clear, however, that those countries, industries, and firms that do invest in and use ICT reap significant benefits. This is as true for Europe as it is for the United States.

Europe’s lack of productivity gains from ICT initially presented a puzzle, because in many ways Europe appeared to be equally well suited to gain from new technologies. Over time, however, the reasons for Europe’s lack of gains appear to have been identified. The primary proximate cause is simply the lack of investment in ICT capital: European countries have lagged significantly behind the United States in ICT investment, both as percent of total investment and as a percent of GDP, since the 1990s. And this is true not just of the ICT-producing sector itself. ICT-using sectors, primarily the service sector, that have been large drivers of growth in the United States have been relatively untouched by ICT in Europe. Productivity in European private-sector services grew only one-third as fast as it did in the United States between 1995 and 2007, because the positive effects of ICT production did not spill over into use.

There are four primary reasons for Europe’s failure to invest in and gain from ICT. First, regulation within product, labor, and land markets limits possible business models, raises the cost of ICT investment, and slows down market forces that can push firms to adopt more productive practices. For example, privacy regulations reduce the effectiveness of online advertising, the “right to be forgotten” legal provision can significantly raise the cost of doing business for a wide range of data providers, and restrictions on cloud provider locations and nationality can slow access and also increase costs. Labor regulations also limit firms from using ICT to reengineer production processes.

The second reason for Europe’s failure to invest in ICT is European tax policy. EU consumption taxes on ICT products are high, which lowers consumer adoption and can therefore slow business adoption of consumer-facing ICT. Corporate tax policies may play a role as well, as depreciation rates for ICT capital investments are generally less generous than in the United States.

A third reason is the limited ability of European businesses to reach more efficient economies of scale. The continued fragmentation of European markets limits the potential size of demand for European goods and services, which in turn makes it harder to achieve economies of scale from ICT investments. Moreover, Europe’s much higher proportion of small firms makes it hard for firms to surmount the high fixed costs of many ICT investments. In the latter case, regulation has provided the significant bottleneck to firm growth, by favoring small firms at the expense of large ones.

A final important difference that explains why Europe has lagged behind the United States in adopting ICT is management styles. Research has shown that getting the full potential from ICT investments requires organizational redesign, and that U.S. firms are better at employing management techniques that can facilitate such transformation.

As Europe emerges from the economic crisis there are a number of steps it can take to ensure that it takes full advantage of the productivity benefits of ICT going forward.

First, Europe needs to be vigilant about “doing no harm.” At this stage the large benefits from innovation and the use of new technologies are largely driven by market forces, but misguided digital regulation can significantly limit these benefits. Unfortunately, recent policy proposals and legislation have not been promising. The “right to be forgotten” and other privacy and data collection rules threaten to add significant costs for internet companies and hold back both ICT adoption and digital innovation in Europe. Likewise, proposals for a “European Cloud” or Europe-centric networks will inevitably add costs and slow down speeds—and may add very little in terms of security and privacy. Europe needs to find ways to address legitimate concerns around digital issues like privacy and security without harming ICT adoption.

Second, making productivity improvement the centerpiece of economic policy is crucial. While employment presents a formidable challenge in many European countries: sacrificing productivity for jobs—that is, deliberately creating or maintaining inefficiencies—is not the answer.

Third, and more specifically, Europe needs to focus on raising productivity in industries where productivity growth has been slow, such as retail and professional services, by encouraging the adoption of ICT. Europe should focus primarily on ICT-using sectors because ICT-producing sectors alone are unlikely to provide significant productivity increases to the economy without the adoption of ICT in other sectors. In addition, actions to encourage the ICT-producing sector may sometimes hurt ICT-using sectors, if protective tariffs or other actions to bias the market toward local ICT producers raise ICT prices for ICT-using industries.

Fourth, Europe can actively assist in the digital transformation of industries by creating the right conditions for ICT investment and adoption. The government can do this through its own procurement and adoption of ICT products, but it can also play a proactive role in addressing network externalities that exist in many sectors.

Fifth, tax and trade policy provide important levers that Europe can use to promote ICT investment. By minimizing taxes on ICT investments, policymakers encourage the productivity effects of ICT use. These tax incentives are particularly important because while ICT investment provides large benefits for the broader economy, the nature of these benefits makes them hard for any single firm to capture; therefore, firms tend to underinvest in ICT. Trade policy can play a role, particularly through an expanded Information Technology Agreement.

Sixth, European firms would be better able to take advantage of ICT if they could achieve larger economies of scale, particularly in ICT-using industries. Recent EU reports have shown that, due to national barriers to entry, the EU is far from a single market in many service industries. Additionally, the Transatlantic Trade and Investment Partnership (TTIP) would better facilitate access to U.S. markets.

Finally, Europe should reduce preferences for small businesses. The high percentage of small firms in Europe, and in Mediterranean countries in particular, holds back productivity. Certain types of small firms are important, such as “gazelle” firms that start small and grow quickly, but many other types of small firms are simply inefficient organizations that have been protected from competition. 

Beyond 2015: An Innovation-Based Framework For Global Climate Policy

May 27, 2014
| Reports

 

Download an excerpt: "Summary of Policy Reforms"

The international climate community is focused on completing negotiations on a new global agreement to address climate change, which will be decided by the end of 2015. Unfortunately, all indications are that negotiators will seek to simply advance many of the tried-and-failed approaches of the previous decades. It’s time for a fundamentally new approach to global climate change; one that looks beyond the staid approaches of years past and directly attacks the core problem: making clean energy cheaper than fossil fuels through proactive clean energy innovation policy.

The world faces two contradictory challenges: mitigating climate change by reducing the use of fossils fuels to bring down carbon emissions, and expanding affordable energy access and economic growth in developing nations.  Unfortunately, prevailing climate policies, including carbon caps and pricing, regulatory mandates, and subsidies to deploy existing high-cost technologies, have failed to effectively address either challenge. As a result, fossil fuel consumption continues to increase, and clean energy, while growing slowly in market share, remains a higher-priced, luxury good incapable of cost-effectively replacing fossil fuel energy.

International climate negotiations, set to conclude in Paris in 2015, are focused on how to integrate countries’ past individual actions into a cohesive global agreement, but most of the policy proposals on the table mirror the unsuccessful approaches of the past 20 years. Rather than continuing down the same path, the 2015 agreement offers an opportunity to craft a fundamentally new approach to decarbonizing the global energy market that prioritizes innovation to make clean energy cheaper than fossil fuels without subsidies. This will enable energy consumers in high-income nations to voluntarily switch to clean energy for economic reasons and consumers in low-income nations to more easily afford clean energy to address energy poverty. Most importantly, it offers the best opportunity to rapidly transition to a global clean energy economy.

Achieving this goal requires the international climate community to support a new framework for clean energy innovation policy based on the following principles.

  • Given expected growth in global population and per-capita GDP growth, the world will not reduce carbon emissions unless clean energy replaces most fossil fuel production. The paramount goal of climate policy should be to make the unsubsidized cost of clean energy cheaper than fossil fuels so that all countries deploy clean energy because it makes economic sense.
  • Innovation of cheaper technologies, and not faster deployment of existing high-priced technologies in developed or developing nations, is the most important way to bring the market price of clean energy technologies below the market price of fossil fuel energy.
  • Countries have differentiated policy responsibilities in achieving this goal, depending on their level of development.
  • Robust government support, especially by developed nations, for significantly greater investment for clean energy research, development, and demonstration (RD&D), is necessary to make energy technologies cheaper than fossil fuels.
  • Climate policy should provide emerging clean energy technologies niche market support to overcome inherent market barriers to commercialization through the use of smart innovation-driven deployment policies contingent upon continued price and performance improvements.
  • Clean energy innovation depends on strong intellectual property protection for companies and entrepreneurs developing clean energy innovations.
  • Unfair clean energy technology competition, including internationally-sanctioned compulsory licensing, limits innovation.
  • Climate policy should not force low-income countries to pay more for clean energy to provide much-needed energy access in the name of global carbon mitigation.

The current approach to global climate policy is based on the notion that we can overcome climate change if all nations raise the price of dirty energy (e.g., carbon taxes or carbon caps), reduce the price of clean energy (clean energy subsidies), and/or simply mandate the use of clean energy.  International climate negotiations aim to pressure countries to do so by committing to carbon reduction targets, even though past efforts to do so have failed to curb emissions growth.

International institutions, like the World Bank, have followed suit by increasing financing for clean energy projects in developing nations, but with no eye towards spurring innovation. And many emerging countries have implemented unfair “green mercantilist” policies—like discriminatory procurement and compulsory licensing—to build domestic industries, which have hurt the process of clean energy innovation globally.

With the lion’s share of national and international climate policy efforts focusing on ways to prop up today’s expensive technologies, there has been a declining interest in developing more competitive, next-generation clean energy technologies. Overemphasis on targets, pricing, regulatory mandates, and deployment subsidies has left few resources to support a dedicated innovation strategy built on support for clean energy RD&D. The world underinvests in clean energy RD&D by roughly $70 billion a year, which amounts to only 13 percent of what the world spends on global fossil fuel subsidies and 27.5 percent what it invests in clean energy deployment.

CCEI proposes a set of policy reforms to turn today’s limited climate approaches into high-impact clean energy innovation policies that give the world a fighting chance at addressing global climate change. When nations meet in Paris in 2015, negotiators should work to create an agreement that allows and encourages nations to the do the following:

  • Instead of being presented with a “take it or leave it” option of signing on to an international agreement to limit carbon emissions, high-income and emerging countries should have the option to participate by committing to investing in clean energy RD&D at an agreed-upon share of GDP.
  • High-income countries should adopt “revenue-raising” policies to support clean energy innovation, including implementing a modest carbon tax, increasing oil and gas drilling fees, and eliminating wasteful fossil fuel subsidies and use a portion of these revenues to support clean energy RD&D.
  • Instead of simply subsidizing the deployment of existing, high cost clean energy technologies, high-income countries should implement “smart” subsidies that are contingent upon technology cost reduction and performance increases so that they support new technologies through commercial scale-up.
  • The UN, the World Bank, and climate financing mechanisms like the Clean Technology Fund should redesign their investment portfolios to limit funding for deployment of existing clean technologies and energy efficiency projects, and instead prioritize supporting transformational energy technologies with financing for large-scale demonstration and smart deployment projects.
  • Although low-income countries often lack the resources and infrastructure to support early stage R&D, they should collaborate with high-income countries and international institutions, like the International Energy Agency, to support the testing and demonstration of next-generation technologies in instances where it may be more affordable than fossil fuels. Engaging low-income countries as “test beds” for advanced energy technologies strengthens the global energy innovation ecosystem while increasing energy access in energy-poor nations.
  • In absence of unilateral action by mercantilist countries to limit green mercantilist policies, including tariffs, forced localization, discriminatory government procurement and compulsory licensing, high-income countries and international organizations should work cooperatively to limit these policies.
  • International institutions, including the World Bank and United Nations, should end inclusion of compulsory licensing in future international climate agreements and immediately stop supporting energy projects that include compulsory licensing of domestic content requirements.
  • The UN should redefine “modern energy access” to the equivalent of what high-income countries benefit from today, sending a signal that much more effort and innovation is needed to advance solutions for global energy poverty.

In short, the world needs to give up the limited approaches of the previous decades and adopt innovation-based solutions as quickly as possible. These proposed policies offer a new start in global climate policy for the long-term, with the recognition that climate change is a technology problem requiring solutions that advance low-carbon technology options. With time running out, it is now or never to get serious about implementing an aggressive clean energy innovation policy.

Innovations For Accessible Elections

May 14, 2014
| Reports

In 2011, ITIF received a grant from the U.S. Election Assistance Commission to help make elections more accessible for people with disabilities. ITIF worked with research teams across the country to assess the current state of accessibility in elections, identify where technology has not lived up to its potential, and build innovative solutions to meet voters’ needs.

We reviewed every part of the election process, from registering to vote to casting a ballot. Our goal was to discover innovative ideas for elections that are:

  • Universal, so everyone can use the same technology
  • Flexible, allowing for differences in voter needs, election procedures, and state laws
  • Robust, based on best practices and able to keep up with technological change

In addition to launching focused research projects to make improvements in voting system hardware, user interfaces, ballot designs, voter education materials, and poll worker training, we also created an open, collaborative process that would allow anyone to contribute ideas. In the end, we designed, built, and tested a number of innovative solutions to help bring us closer to the day when all citizens, with or without a disability, can vote privately, securely, and independently. This report catalogs some of these achievements.

Unlocking the Potential of Physician-to-Patient Telehealth Services

May 12, 2014
| Reports

Imagine a world where patients in rural areas far from a nearby doctor can easily find a health care provider to consult with online from the comfort of their own homes; where doctors living in Pennsylvania can help reduce the backlog of patients waiting to see doctors in Mississippi; and where patients can connect to a doctor over the Internet for routine medical purposes with a few clicks of the mouse—like they do when ordering a book on Amazon. Fortunately, this vision could soon become reality, but only if the federal government and the states work quickly to remove regulatory barriers that limit the deployment and adoption of provider-to-patient telehealth capabilities.

 Within the past five years, a combination of advancements in information technology (IT) including electronic health records, low-cost, high-definition video conferencing, remote monitoring devices, mobile devices and networks, and faster and ubiquitous broadband networks, has created an opportunity to leverage telehealth services to improve our national health care system. Health care workers can use telecommunications technology to provide clinical services to patients, to monitor patient health, to consult with other health care providers, and to provide patients access to educational resources. Importantly, the technology has reached the point where, in many situations, health care providers can use IT to offer a comparable quality of clinical health care services remotely as they could in person. For example, the widespread adoption of mobile devices like the iPad and iPhone, as well as the deployment of mobile broadband networks, means that a large number of Americans have access to low-cost, high-quality video conferencing capabilities. While telehealth services will certainly not replace all in-person clinical visits, they have the potential to be an important alternative in many cases, while also saving money and increasing convenience.

However, the regulatory and policy environment has not kept pace with the technology, and several barriers must be overcome before patients and doctors in the United States can fully enjoy the benefits of telehealth. Steps needed include: establishing common standards of care for patients; simplifying inter-state licensing requirements for health care providers; and creating reimbursement policies that support telehealth services. This report describes the new telehealth opportunity, analyzes the benefits from telehealth, examines the barriers to widespread adoption in the United States, and proposes a number of recommendations for government. In particular, policymakers should:

  • Adopt a standard definition for telehealth,
  • Establish a single, national license for telehealth providers,
  • Create technology-neutral insurance payment policies,
  • Promote interoperability among state prescription drug monitoring programs, and
  • Fund research to continually improve the quality and lower the cost of telehealth programs.

Why Geoblocking Can Increase Consumer Welfare and Improve Income Equality

May 5, 2014
| Reports

As the world economy becomes more integrated, it is increasingly common for the same product to be offered in many different national markets, often with very little or no local modification. Despite the sameness of the product, however, its price can vary, sometimes significantly, depending upon the country in which it is purchased, a process known as geoblocking.

For the most part, customers understand and accept these variations. But their understanding may be challenged when the goods are purchased on-line. In that case customers often believe that they should be quoted the same price absent charges for shipping and tax wherever in the world they order from, since the product is presumably being shipped from the same location and the seller cannot tell where the customer is located. Their acceptance may become even more strained when purchasing digital goods because in this case the production cost is basically the same no matter where the good is made and, if the product is downloaded, “shipping” costs are close to zero.

As it turns out, neither of the above assumptions is true. Companies can tell, with a fair level of precision, exactly where a customer is located when he or she purchases a product online. In addition, there a number of legitimate reasons why a company might logically vary its prices by region, even for digital goods.

Still, geoblocking for digital goods has sometimes generated opposition as customers (and policymakers) in high priced locations complain that they are paying too much. Why shouldn’t the same digital products be available at the same price to all locations in the world? Are these complaints legitimate? Why do companies need to track the location of their customers? Are there valid reasons why companies may tailor their sales strategies geographically? Does the practice raise anticompetitive concerns? Should governments attempt to fashion a remedy? This report answers these questions by explaining some of the valid reasons why companies look at customer location on the Internet, why varying price by geographic location often makes sense, and why doing so can help consumers and spur more innovation.

There are many valid reasons for collecting location data. For instance, many countries place limits on the products and services, such as cigarettes or Internet gambling, sold within their borders. Countries may also impose different requirements on the procedures and warnings that companies have to comply with in order to make sure purchasers are of legal age or otherwise authorized to transact business. Second, taxes usually vary widely by jurisdiction. When a company is required to collect tax on behalf of the jurisdiction, it must be able to determine where the customer is placing the order from.

There are a number of legitimate reasons for geographically-based price differentiation.  One key reason is that it allows companies to set prices lower for consumers in in low-income countries that cannot afford a global price. If the producer is forced to set one global price, they will be unable to offer lower prices in these nations where consumers’ ability to pay is more limited.  These sales can actually benefit all consumers by increasing total revenues, permitting the same level of profit at a lower average price. Whenever marginal prices approach zero, any additional sales increase revenue, which can be used to keep the price low, reinvest in the next generation of products or increase profits. The economic impact of these sales in low income nations may also be highly progressive, by giving the poorest customers access to modern educational, health, and information services at close to the marginal cost while richer consumers cover fixed costs. These lower prices can also reduce digital piracy, especially since the ratio of average costs to income is highest for low-income consumers. 

Markets ultimately run on mutual agreement. Government cannot make companies produce good music, movies, or software. And companies cannot make consumers pay more for a product than they think it is worth. In the end both parties – producers and consumers – must agree on a price. Producers often lose a lot of money pouring large up-front costs into products that consumers do not want. And consumers often get frustrated when they find out that someone else paid a lower price, possibly because they waited until later in a product’s cycle. But on the whole, these arrangements have delivered rapidly improving products and a declining cost. They also increase total social welfare beyond what would be achieved by requiring a single worldwide price.  

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