Friday, December 28, 2012

Patenting Human Genes

A friend of mine sent me THIS article about human gene patenting, which basically makes the assumption that the practice is absurd and should be stopped. But it's not that simple.

If a company manages to identify a specific gene - the gene for breast cancer, for instance - our legal system currently recognizes that as a patentable discovery. Is this sensible? The question is whether identifying genes is novel enough to merit a patent, which depends on how difficult it is to identify a specific gene. Presumably you can't just point to a gene and say "I patent that one!" You have to figure out the function of that gene. If it turns out that that is a relatively simple process, then gene patents should probably be thrown out as trivial. But if it's not so easy - if it takes hard, dedicated work by experts to figure out which genes do what - then a patent makes more sense. The reasoning behind patents is that the people who do the research and the inventing are not typically the same people who are best at making products and taking them to market.  Patents induce researchers and inventors to develop intellectual property in order to sell it to the companies that can turn that intellectual property into useful products.

If intellectual property rights did not spur innovation, then we could get rid of them. It's really not about the moral imperative to reward people for their work, but about the social imperative to induce people to work by offering rewards. IP is not typically regarded as a fundamental right. Rather, it is a legislatively invented right, a state-issued monopoly authorized by the Constitution for the explicit purpose of encouraging innovation. We are allowed to tweak the rules if we can make the patent system more efficient.

If it turns out that you get more bang for your buck from a 10-year patent term for genes than you do for the current 20-year term, then we could make that change. If it turns out that we actually get more innovation by exempting genes from the patent system entirely, then we should do that. But we should not just eliminate patents for genes entirely out of a knee-jerk reaction if that means less innovation. We want researchers to research and we want companies to turn their research into useful products, and the traditional way to get that is through patents.

We can also recognize a distinction between using someone else's patent for research and using someone else's patent to sell a product. The law already makes such a distinction regarding pharmaceutical patents, and it may already be the case for gene patents, too. The idea is that you can use someone else's patent for free when you are just doing research. If your research pans out, only then do you have to license or buy the other patents in order to sell your product.

Now, patents are short-term monopolies, and the obvious problem with monopolies is that the monopolist will try to extract monopoly prices. How do you handle that? If someone has a patent on the one thing that will save your life, how do you stop them from squeezing every last penny out of you? Congress can require patent-holders to use RAND pricing - Reasonable And Non-Discriminatory. It has to be enough to allow a decent profit margin that accounts for the high costs associated with research and development, but not so much that it is considered unreasonable either by the statute or by a judge. That's how you get around the price gouging problem.

As I said, patents are a legal invention, not a fundamental right. We use them because they work. If we can fine-tune our patent system to make it better, great. But the current debate about patents seems to focus overwhelmingly on the costs while ignoring the correlative benefits, and you just can't get the calculation right that way.

Here's the point: In order to address an ailment associated with a specific gene, it may help to know which gene. It's not so crazy to pay the guy who figured out which is the relevant gene, because then he might spend his time identifying the functions of other genes.

Thursday, December 27, 2012

The Importance of Being a Fan

Whether Lebron James has fans might affect the sales of his jersey, but it doesn't affect his stats. It doesn't affect the scoreboard. It doesn't affect his rank. In some sense, it doesn't matter if Lebron James has fans because he is still, objectively, a great basketball player.

But it does matter whether William Blake has fans. He might have been just some cooky, idiosyncratic guy whose poems and art would have faded from history if each generation did not find some passionate admirers to champion his work - guys like Wordsworth, Northrop Frye, Alan Ginsberg, and Harold Bloom. And those guys, too, are only relevant because they have fans. In the contest of ideas, you either have fans or you don't exist.

That's why I make no bones about being a Richard Epstein fan. I think he is the Aristotle of our age, the Lebron James of thinkers. He puts up intellectual three-pointers like it ain't no thing, yet in the debates of our day he is a virtually unknown player. Epstein is doing his job. He needs more fans out there lobbying for him. So, this is me lobbying for The Smartest Person Alive. Do yourself a favor and acquaint yourself with Richard Epstein by subscribing to this podcast: http://ricochet.com/podcasts/law-talk

Thursday, December 20, 2012

Multiverse Board Game

Damn it, as if I didn't have enough projects to work on, I just had a really great idea that I will have to pursue or it will haunt me.

In 2013, I'm going to make a Kickstarter project for an ironic party game for geeks called Not Happenin'! Participants will compete to see who can come up with the most creative/interesting thing that isn't happening anywhere in the Multiverse - basically, formal contraditictions like "The bachelor in the circular room is speaking with his wife in the corner."

Or... maybe... one person has to come up with a sentence, and then the others have to turn it into a logical impossibility. Participants score points for every contradiction they can embed in the sentence.

And to take it even further, the point system should accommodate different types of impossibilities. I'm reading about them here: http://en.wikipedia.org/wiki/Subjunctive_possibility#Types_of_subjunctive_possibility

Let's say each logical impossibility gets, for fun, pi points. (So you've gotta have a calculator with pi in order to play.) A metaphysical contradiction can get 2 points, nomological can get 1, and temporal can get half a point. This could actually be fun!

Ok, I'm publishing this idea here so nobody can steal it.

UPDATE: Ok, as I think about this, there need to be parameters on how people can expand the sentence. Maybe it just needs to be a grammatically correct sentence, but limited to three or four clauses. Or maybe there are constraints on how many nouns can be added. "In the corner of a cicular room" would work for just about every sentence, so you need to avoid things like that. Maybe you have to stick to the nouns and verbs given. I dunno, I've gotta think about this and experiment to see if it would actually work as a game. I like the premise, though.

UPDATE #2: Example: "The dog is barking at the mail man." You could turn that into: "The scaly dog is barking silently at the ovulating mail man." Dogs, by definition, are mammals, which categorically do not have scales; therefore a creature with scales is not a dog. I think that counts as a metaphysical contradiction, right? (Maybe I should do away with the logical / metaphysical distinction since the difference is so unclear...) Then you can't bark silently because barking is, by definition, producing a sound. And the ovulating postal worker, by definition, a is not a mail man. I think those would count for 2 points each, so I'd get 6 points for that.

I just had another idea. You can't use pronouns as either the subject or the object.

So here's another example: "The bartender called the repairman because the air conditioning unit stopped working." (As I'm thinking of these examples, I'm just trying to pull sentences out of thin air rather than thinking through how they might be used.) Ok, so using that example we could come up with: "The absent bartender on the moon never called the destructive repairman because the constantly inert two-piece air conditioning unit stopped working."

I used a bunch of new tricks with this one. First of all, we can construe the word "bartender" to be contingent on tending the bar, which he can't do if he's absent. (Of course a bartender is still a bartender even when they're not tending bar, but making these sorts of linguistic arguments will be the name of the game.) Second, on the moon there is no air for an air conditioner, so is it a nomological impossibility? Someone could argue that if a person is on the moon then that means they are in some kind of moon base with air; maybe the person who came up with the sentence has to be the judge? Or by vote? Or maybe if you can get one other person to endorse your crazy explanation, then it goes to a coin toss to settle the dispute? Anyway, third you could argue that a repairman is by definition not destructive. Fourth and fifth, the word "constantly" can be used to negate "stopped," just as "inert" can negate "working." Finally, "two-piece" contradicts "unit."

Oh, there's one more. By saying he never called the repairman because it stopped working, the sentence becomes illogical. Why would you never call the repairman because it stopped working? Introducing that kind of contradiction should get points too even though it doesn't actually make it impossible.

Oh, duh! If multiple people come up with the same thing, they cancel each other out, like in Scattergories. And maybe should limit adjectives to 1 per noun? Or maybe not; as long as they can cancel out, it benefits to add as many as possible. But if they don't cancel out, then the strategy is to try to differentiate from your opponents. Hmmm...

I think I've got the basis for a fun game here!

The Multiverse and Infinite Probability

Something I just read reminded me of probably the most mind-blowing idea ever. Prepare to trip out:

Because the balance of the forces and quantities in the universe is so precisely tuned that even small variations would make the formation of complex matter impossible, it follows that we probably live in a multiverse full of universes. (Just like we're on a Goldilocks planet, we're in a Goldilocks universe.) That's not science fiction; it is, I believe, more or less the consensus view.

So how many universes are there? Any finite number seems to imply a kind of arbitrary limiting condition, so the simplest (and therefore most likely) answer might well be that there are infinite universes. IF THAT'S THE CASE, then there must be other Kevin Freis out there typing this very sentence, and other versions of you reading it. The mind-blowing part is that this isn't like in the tv show Sliders, where every quantum outcome generates a parallel reality (which is a freaky possibility too). Rather, there are other Kevin Freis in other universes typing this sentence as a pure COINCIDENCE!!! And not just one Kevin Frei, but an infinite number of Kevin Freis. And not just typing this sentence, but doing every conceivable activity. Again, not because these are parallel universes of the regular sci-fi type, but because no matter how improbable a coincidence - like, a planet evolving in exactly the same manner down to the quantum level - in an infinite number of universes it must occur an infinite number of times. I hope your mind is blown for the day!

Friday, December 14, 2012

My Take on the Second Amendment

Like a lot of people, I've been thinking about the Second Amendment today. I think I came to something resembling a conclusion, which I would like to work out here. Bear in mind that I'm an amateur at this with no real training, so these are just my opinions.

To begin with, let's leave aside the question of whether gun ownership is a natural right and focus on the salient question, which is how it operates as a legal right.

The Second Amendment reads:

"A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

The Second Amendment is part of the Bill of Rights, which was added to the Constitution to get the necessary states to sign it. The argument against including a Bill of Rights was that it implies that any State action not specifically prohibited by it is fair game, when in fact anything not specifically enumerated by the Constitution is meant to be prohibited. That was a big debate, but the prevailing argument was that the Bill of Rights merely clarifies certain liberties without extending new powers to the State. A little redundancy doesn't hurt, in other words. It turns out that over time the enumerated powers have indeed been interpreted so broadly that we are lucky to have the extra protection of the Bill of Rights.

With that in mind, let's look at how the right is constructed. There is the prefatory clause - "A well regulated Militia, being necessary to the security of a free State" - and the operative clause - "the right of the people to keep and bear Arms, shall not be infringed." In the decision in the Heller case, Justice Scalia writes that "apart from that clarifying function, a prefatory clause does not limit or expand the scope of the operative clause."

Now, I don't think there is universal agreement that you should separate the clauses like that. I say "should" because Scalia makes a good argument that you can. What dawned on me today is that in a world where the enumerated powers are read narrowly, we can read the Bill of Rights narrowly, too, because the Bill of Rights does not set the parameters of our liberties - it merely highlights a few of them.

Imagine the second amendment read: "Because people need to exercise, Congress may not pass laws prohibiting cartweels and front flips." Does that mean it can regulate acrobatics done for fun rather than exercise? Well, since the Constitution doesn't explicitly grant Congress the power to regulate acrobatics, the answer is "no" regardless whether we read the amendment narrowly (with the prefatory clause limiting the operative clause) or broadly (with the prefatory clause not limiting the operative clause).

In a world where the enumerated powers are interpreted broadly, anyone wishing to expand the scope of liberty will be inclined to interpret the Bill of Rights broadly, too. Currently we give Congress enormous discretion with regards to the enumerated powers, and I think that is not in keeping with the framers' intent. If we take a more originalist perspective regarding the enumerated powers, I think we will be more comfortable considering a more narrow interpretation of the Bill of Rights. In that kind of Constitutional order, we might conclude that the Second Amendment right to bear arms is indeed limited by the prefatory clause, contrary to the decision in Heller, while at the same time conceding that the scope of the liberty goes far beyond the Second Amendment because it is outside of the enumerated powers.

So according to this analysis, a limited federal government cannot place restrictions on the right to bear arms. Now, what about the states? Well, the pre-Civil War Constitution primarily placed limits on the federal government, not the state governments. So at the time of the framing, I'd say that the states could restrict guns in any way they want.

The Fourteenth Amendment changed the game by binding the states to the substantive guarantees of the Constitution. However, it didn't list precisely what those guarantees are. Over the past hundred and fifty years, the "incorporation doctrine" has been used to bind states to most of the protections of the Bill of Rights. In McDonald v. The City of Chicago, the Supreme Court upheld the incorporation of the Second Amendment.

So here's where it all comes together: If we have a broad interpretation of the Second Amendment (Heller), and then we incorporate that interpretation against states (McDonald), then there is little the states can do to experiment with different degrees of gun regulation.

But going back to how we should read the Second Amendment, it's not just a matter of whether the prefatory clause binds the operative clause in this case; it's a question of whether prefatory clauses bind operative clauses as a matter of interpretive principle. In a world where the enumerated powers are read broadly and Congress can do almost anything not explicitly prohibited by the Bill of Rights, we might not want to limit our rights further with prefatory clauses. But if we interpreted the enumerated powers narrowly and committed ourselves to a limited federal government, we could safely limit the operative clauses with the prefatory clauses without losing liberty at the federal level, while at the same time reducing the scope of our protections against the states. That could be a good thing or a bad thing, depending on your views. Personally, I would prefer more discretion at the state level, even if that means that some states will be worse than others, because I believe that competitive diversity yields improvement.

Thursday, December 13, 2012

When Democracy Works

The democracy game works when equals sit down to a series of negotiations on issues in which they all have a stake. Under those conditions, self-interested parties will agree to certain propositions in order to avoid the prisoner's dilemma situations that would otherwise leave everyone worse off. The first such proposition is majority or supermajority rule. You can't expect to win if you're not willing to lose. When it's a "this or that" situation, you want majority rule. When it's a "something or nothing" situation, it's often better to have a supermajority rule.

The second proposition is that all rules must bind all parties equally. The reason for this is that a group of diverse individuals will have diverse interests, so the same individuals will not likely be in the same factions at all times. If the winning faction uses its majority rule to gain an advantage in this game, many of those individuals will find themselves in the losing faction in subsequent games. The result will be that factions will extract greater and greater advantage when they win while putting themselves at greater and greater disadvantage when they lose. When this happens, all parties are made worse off. The solution is to agree upfront that all rules must affect all parties equally in order to avoid a series of asymmetric outcomes.

The US Constitution works because its framers were on a relatively even playing field. It was in the best interest of all parties to forego certain powers lest those powers be used against them on issues in which they are in the minority.

We all have an equal interest in freedom of expression and belief, self defense, infrastructure like roads and bridges, clean air, sound laws and courts, etc. These are areas where democracy should function relatively well because the above propositions may be observed. Unfortunately, we do not all have an equal interest in economic matters, so people do not feel compelled to follow the second proposition. Yet if we had the wisdom to follow it anyway and stick to general rules that bind all parties equally, we would avoid all these terrible prisoner's dilemma games and the deadweight losses they produce, and collectively we would be better off.

Wednesday, December 12, 2012

Allocative Inefficiency


Imagine a group of people all received video games on Christmas, but none of them received the game they wanted most. Then imagine a fairy came and replaced all their games with the games they valued highest. Everyone benefited from this, yes? Yet it would be very hard to quantify the surplus benefit each individual received by having their game replaced with a game they valued more.

Certain economists of a certain political stripe act like if you can't measure an improvement, it doesn't exist. Everyone would agree that in the above scenario the total welfare was raised even if it's not reflected in the GNP. Yet when it comes to talk about tax reform, some economists act as if allocative efficiencies are unimportant. They focus on the fact that the total number of games remains the same rather than the improvement in utility due to better allocation.

What is this related to? It's related to articles like this one from Ezra Klein: http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/16/sorry-washington-tax-reform-wont-do-much-for-growth/

GNP only measures the sliver of economic surplus that can be quantified. You can raise someone's welfare just by smiling at them. When you think about distortions in the economy, you can't just think about static effects on GNP. You have to think about the fundamental processes that optimize welfare both quantifiable AND unquantifiable and consider how our policies affect those processes.

And another thing: you don't have to affect growth "much" to affect the economy a LOT over time.

Monday, December 10, 2012

Richard Epstein Fan Site

Because I'm a huge nerd, I put together a fan site for Richard A. Epstein: richardallenepstein.blogspot.com

I figure the smartest person on the planet ought to have a fan site. Also, I think that man has the answers to all of our problems and I want to help disseminate his ideas far and wide.

Saturday, December 8, 2012

The SEC Will Ruin the JOBS Act


The SEC is going to ruin the JOBS Act. Below is a statement from the new head of the SEC regarding the issue that is the main reason I started this blog. Just look at this language: "I think everyone can agree that removing the ban on general solicitation, essentially allowing public 'offers' in private securities transactions, is a fundamental change in the securities markets. We must be vigilant about the potential consequences, particularly unintended consequences, of a significant change like this and consider ways to mitigate potential harms to the investor while preserving the rule's intended benefits."

Here's how I interpret that: "Congress naively passed a law that we don't like, so we are going to write rules that will render the new law useless and preserve the status quo, just as we are doing for Crowdfunding." Here's the statement in full:

    As you know, the Commission has proposed a rule that would end the ban on general solicitation in sales to accredited investors. We have received a number of helpful comments from a variety of differing perspectives. Many comments, including ones from the small business community, strongly support ending the ban as a step toward facilitating capital raising. Other comments have focused on potential consequences to investors of lifting the ban. I feel strongly that we must take these potential consequences seriously. I think everyone can agree that removing the ban on general solicitation, essentially allowing public “offers” in private securities transactions, is a fundamental change in the securities markets. We must be vigilant about the potential consequences, particularly unintended consequences, of a significant change like this and consider ways to mitigate potential harms to the investor while preserving the rule’s intended benefits. 

    People often frame this discussion as “balancing” the desire for easier capital formation against the need for investor protection. But I see this as presenting a false choice, and I hope that you do as well. A vital prerequisite to efficient capital formation is a market in which investors have confidence. If allowing general solicitation results in increased incidence of fraud or sales of securities to investors that do not have the sophistication to understand the risks and merits of a particular investment, we will have failed not only investors, but small businesses as well. In other words, regulations that protect against these risks — without placing undue burdens on businesses — will benefit all participants in the capital markets. On the other hand, we should not block this change because we are afraid that harm will result; it is the responsibility of regulators (and market participants as well) to determine how to obtain the benefit of the change while safeguarding against the downside risks to investor protection and the public interest.

    Accordingly, I hope that in your sessions today you will discuss and consider various safeguards that some commenters have suggested in response to the proposed rule. In particular, please take a look at the recommendations of the Investor Advisory Committee. For example, does it make sense to place some limitations on the forms of solicitation? To reconsider our definition of accredited investor? To include in the rule specific methods that issuers can use to verify accredited investors? To condition, on a permanent or temporary basis, the availability of general solicitation on the timely filing of the Form D? I am confident that we can find some common ground between the business and investor communities on these issues.

Tuesday, December 4, 2012

The Other Side of Dynamic Scoring

My recent post Tax Rates and Tax Revenues talks about dynamic vs static scoring of tax policy. In a nutshell, static scoring tells us a given policy's predicted effect on tax revenue if we assume that everything stays the same. Dynamic scoring tries to make revenue predictions based on assumptions about how the policy will affect behavior. When liberals promote a tax hike, they like to use static scoring and downplay the dynamic effects of tax policy; when conservatives promote a tax cut, they like to use dynamic scoring and exaggerate the effects that tax policy will have on the size of the pie. The problem with static scoring is that it's unrealistic, and the problem with dynamic scoring is it varies depending on the assumptions you make.

Like taxes, spending is also scored using either static or dynamic measures. Mark Thoma and Paul Krugman explain it in detail here.

The idea Krugman wants to convey is that spending creates an economic surplus, some of which returns to the government as revenue. It's a slick argument, but something feels not quite right about it. To what extent does government spending merely displace private spending? To what extent does present spending merely displace future spending? What about when that money is sent overseas to buy goods that depreciate quickly? What about when that money is allocated in ways that cause distortions or actually destroy wealth?

It seems to me that private spending still trumps public spending by a mile. Some extra public spending on infrastructure, where it is unlikely to crowd out private spending, might be a sensible measure to take when and if we are in a liquidity trap. But those articles were written in 2009; here we are at almost 2013 and there is talk about raising taxes while the economy is still in the dumps. So now we are talking about actually taking money from the private sector in order to maintain high levels of public spending, almost none of which is going toward infrastructure. I think it's a bad idea.

Saturday, December 1, 2012

Tax Rates and Tax Revenues

In a recent article titled The Great 2012 Cashout, The Wall Street Journal highlights how an expected rate hike on capital gains is affecting investor behavior. I sent that to a buddy of mine, and he responded with this article from the Committee for Economic Development as a counterpoint. That article argues that while changes in capital gains rates may spur large temporary changes in behavior, those changes have little long-run effects on revenue.

But if raising the tax rate on capital gains does not increase revenue, what does that say about capital gains? Doesn't it say that an increase in the rate is offset by a decrease in overall capital gains, so that on the revenue side the whole thing is a wash? Doesn't it matter that capital gains are decreased? If 10% of Pie A is equal to 30% of Pie B, what does that say about the size of the pies?

In a world where tax changes have no affect on behavior, a higher rate will yield higher revenue. But that isn't reality; we live in a world where taxes do affect behavior. When politicians tout the benefits of a tax increase, we have to question what assumptions they are making about the dynamic effects of that increase. If they underestimate those effects (as they have a strong incentive to do), the promised revenue will fail to materialize. A typical difference between liberals and conservatives is that liberals assume very small dynamic effects and conservatives assume very large ones.

To sell a tax cut, exaggerate the benefits by making very large assumptions about the effects of tax policy on behavior. To sell a tax hike, exaggerate the benefits by making very small assumptions about the effects of tax policy on behavior. If history shows that tax policy usually has a negligible long-run effect on revenue, the implication is that changes in rates are directly offset by changes in behavior. Our goal therefore should be to maximize the pie.