People as Brains
Some comments of human capital, knowledge, and development
Last month, economist and blogger Alex Tabarrok wrote about the challenge of harnessing the benefits of publicly-funded scientific research. He questioned the common wisdom, or theory, that public science is a public good;
Science seems like a public good; in theory, ideas are non-rivalrous and non-excludable. But the closer we look at how ideas actually spread and are used in the world, the less they seem like public goods. As I am fond of pointing out, Thomas Keller wrote a literal recipe book for the dishes he served at his world famous French Laundry restaurant and yet, the French Laundry did not go out of business. Ideas are in heads and if you don’t move the heads, often the ideas don’t move either.
Alex is skeptical that expanding publicly-funded science is a universal good because it can be a barrier to private research and innovation - which is bad for productivity and growth. He was writing this on the back of a recent paper by Ashish Arora et al, which provides some evidence on how different components of public science impact corporate R&D, and the complexity of the positive influence of human capital on innovation. The paper suggests that public inventions may reduce corporate research efforts, and abstract knowledge alone has limited practical effects.
I am certain that Arora et al is not the last word on this subject, but an important observation (implication) from the paper, which Alex also pointed out in the quoted passage above is that knowledge is often embodied in people and not just the output. I am still very persuaded that public science has a lot of value - especially in the creation of a new market where there are no initial profits and hence no incentives for the private sector to make the first move. But the caution that public science is not a public and universal good which can be freely accessed at any time is very useful for development. To usefully access the knowledge, you need to access the people.
Romer's Round Trip
Paul Romer, who won a Nobel Prize in economics for his theory of economic growth, believed that a useful way of thinking about the process of growth is to carefully distinguish between human capital (H), and knowledge (A) - because mixing up the two can create false theories that assume that knowledge is transferrable without barriers.
I am a big fan of micro-foundations; provided, that is, that they are true. What has given a reliance on micro-foundations a bad name is letting people get away with using ones that are false and claiming that this has anything to do with science.
Here is the true micro-foundation that I used to think about human capital. Human capital is stored as neural connections in a brain. For example, when a person reads from a book how to use a 3-4-5 triangle to construct a right angle using only a measuring rod, this information is stored in a set of neural connections in his/her brain. These neural connections increase the productivity of this person as a carpenter. To get empirical proxies for human capital, we measure the time someone spends reading or this increase in productivity, as reflected in the carpenter’s higher wage.
Once you have this micro-foundation in hand, it is crystal clear that human capital is a rival good and that even without any legal protection, human capital is almost perfectly excludable. Short of torturing me, there is no way for you to get information out of my neurons that I do not want to give to you. When I give someone information, for example by answering a question, I’m engaging in voluntary exchange in exactly the same way as when I hand this person some object that is in my possession.
Now, here is an alternative micro-foundation for human capital. There is a little homunculus inside each person’s head who knows everything the person knows and who has his own low-powered ham radio station. When two people come into proximity, neither of them can prevent the homunculus in each head from broadcasting over the ham radio to the other homunculus, all the things it knows. So the mere fact of close proximity causes valuable bits of knowledge, such as how to make a right angle using only a measuring rod, to flow from one person’s head to the other person’s head, which then raises the productivity of the other person as a carpenter.
This micro-foundation justifies the idea that human capital is not fully excludable. In less precise language, it justifies human capital externalities or spillovers. As you may have noticed, this micro-foundation is also false.
If you accept micro-foundations that are false, you can reach all kinds of incorrect conclusions. (Sprinkle around the phrase “as if” and they will still be incorrect.) But if you stick to micro-foundations that are true, human capital is perfectly excludable. There are no human capital externalities. Zero. Nada. Zilch.
So how can we tease out the meaning we can extract from the inchoate sense many people seem to have that there are human capital externalities? The key is to look at the production process I mentioned in the beginning: Someone with H can use it to produce some A.
Romer suggested an alternative model that does not rely on some ‘‘spooky action at a distance’’:
Again, it helps to be precise by invoking a (true) micro-foundation. Suppose that someone with some H that encodes knowledge of the Pythagorean theorem and 3-4-5 triangles writes this down in words and symbols that go into a book. This means that he/she has used H to produce some codified knowledge A. Suppose also that it is costless to copy books. (This simplifies the argument presented here, but the argument is little changed if it is expensive to copy the book. I’ll come back to this point in a subsequent post.) This codified knowledge is a nonrival good. The pages of the book can be copied many times. Then many people can use the information in the text at the same time. And what might they do with it? They will go through the reverse transformation, one that I did not try to capture in my model. They will use A to produce H so they can be better carpenters. Or better mathematicians.
If there is no legal protection that prevents copying of books, then A is nonexcludable. Having something like copyright protection for books might or might not be a good thing. This is what makes it intellectually interesting to consider changing the rules that determine the degree of excludability for A. But to be precise, the fact that H can produce something that might be nonexcludable does not mean that H itself is nonexcludable.
People make the claim that there are human capital externalities because they have not figured out how to reason separately about H and the A that it can produce. If you lump them together and pretend you can’t tell the difference between text on the page and the neural connections in someone’s brain tissue, you can sorta convince yourself that when one person knows the Pythagorean Theorem, this knowledge just sorta gets spread around by the these overactive homunculi.
But this kind of sloppy thinking closes off another intellectually interesting opportunity, looking in more detail at how H in neurons gets translated into a codified form A and then, typically, back into H in someone else’s head. Of course, this is not the only way for A to produce value. For example, a new piece of A might take the form of computer code that runs on a machine that produces some value. But most of the A produced by the H in one brain, creates value when it is used as an input in the production of new H in another brain.
This round trip (Romer's phrase) between human capital and knowledge can help us understand Tabarrok's skepticism about public science. Simply producing a body of knowledge that is useful does not make it automatically usable. For knowledge to be usable, then people have to turn it into skills that are encoded in their brains. This process is not something that simply travels in the air. It involves people teaching other people, and actively collaborating with them.
Again, none of this is particularly new. Over two decades ago, Iain Cockburn and the great management economist Rebecca Henderson showed that the pharmaceutical firms that benefit the most (by being more productive) from public research are those who invested in in-house research capacity and also have a high degree of ''connectedness'' to public researchers. One of their measures of ''connectedness'' is collaboration in the form of coauthorship between public and private researchers. The same can be said of the semiconductor revolution and the rise of Silicon Valley. The ‘‘traitorous eight’’ leaving Shockley's Lab started a process that spurned the growth of the industry that powers the modern economy today.
Playing Catch Up
American rapper and music producer Kanye West once talked about how he made one of his songs to compete with another artist. His problem was that his song did not sound as good as the record he wanted to compete with. After several efforts with other producers to fix it, he had no choice but to go to the producer who made the song that inspired him. In the words of Kanye West, "He fixed it in 5 minutes and spent the rest of the hour talking about how no one could've done it but him". The moral of this story is that the spread of knowledge that enables more technological innovation, creativity, productivity, and prosperity, almost always involves moving brains. It is tempting to think this only happens in rich countries or at the cutting edge of innovation. But the rise of the garment industry in Bangladesh to become an export powerhouse in a desperately poor country is a good counterexample. This is how economist William Easterly recounts it;1
Noorul Quader watched in 1980 as his brand-new factory, Desh Garments Ltd. in Bangladesh, produced its first shirts. Bangladesh did not have a large garment industry to speak of before Quader started Desh Garments Ltd. Bangladeshi garment workers in 1979 were a lonely group, because there were only forty of them. Quader's machines kept humming the rest of 1980, producing 43,000 shirts in his first year of operation. A factory that produced that many shirts, exported for $1.28 each to yield a total sales of $55,500 in sales, Bangladesh today produces and exports nearly $2 billion worth of shirts and other ready-made garments - 54 percent of all Bangladeshi exports. [Easterly was writing this in the year 2000, today Bangladesh garment exports is worth $42 billion].
To see how Quader's $55,500 turned into $2 billion, we have to go back a step, before his factory got started. Quader, a former government official with international connections, had an ally in his quest to start a shirt factory in previously shirtless Bangladesh. The ally was the Daewoo Corporation of South Korea, a major world textile producer. Daewoo was looking for a new base to evade garment import quotas that the Americans and Europeans had imposed on the Koreans. These quotas did not cover Bangladesh, so a Daewoo-supported venture in Bangladesh would be a way to get shirts into forbidden markets.
Daewoo and Quader's company, Desh Garment Ltd. , signed a collaborative agreement in 1979. Its key feature was that Daewoo would bring 130 Desh workers to Korea for training at Daewoo's Pusan plant. Desh would pay royalties and sales commissions to Daewoo in return, amount to 8 percent of sales value.
The collaboration was a great success - too much of a success, from Daewoo's point of view. Desh Ltd. managers and workers learned too fast. Quader canceled the collaborative agreement on June 30, 1981, after little more than a year of production and watched production soar from 43,000 shirts in 1980 to 2.3 million in 1987. Although Daewoo did not do badly from the collaboration, the benefits of its initial investment in knowledge had leaked beyond what Daewoo intended.
But not even Desh Ltd. could control the shirt mania from leaking to others. Of the 130 Desh workers trained by Daewoo, 115 of them left Desh during the 1980s to set up their own garment export firms. They diversified into gloves, coats, and trousers. This explosion of garment companies started by ex-Desh workers brought Bangladesh its $2 billion in garment sales today.
This story highlights an important part about development that is underrated. What we are used to being told is existing knowledge and technology can be easily copied by poor countries and this will drive catchup growth. When development policy folks talk about things like Foreign Direct Investment (FDI), there is more emphasis on the factories and the machines than the transfer of brains that characterises the successful episodes of FDI-driven growth. Polticians and policymakers in developing countries are obsessed with brain drain from emigration, and do not make policies that can lead to 'brain gain' from other countries in important sectors. Even in policymaking itself, economic reforms and engineering successful economic transformation cannot be easily copied without talented people working in government at all levels. If development happens by countries becoming more capable at doing more complex things, and the ability to do complex things depends on having the know-how2, then we cannot escape the conclusion know-how involves attracting the actual brains that have them.
''People are brains''
When I think about development and policies that can lead to prosperity in poor countries, I believe that beyond the actual policies, decisionmakers and influential people in society need intuition pumps.3 These are tools that open up thinking is simple but powerful ways. The persistence of bad policies, and the inability to think differently rely on some very strong intuitions. So sometimes you need to activate different intuitions to be able to think differently and see other paths. One useful intuition pump for me was provided by Alex Tabarrok (from above) in his tribute essay about the work of Nobel prize winner Michael Kremer;
I like to say that there are two views of humanity, people are stomachs or people are brains. In the people are stomachs view, more people means more eaters, more takers, less for everyone else. In the people are brains view, more people means more brains, more ideas, more for everyone else.
This is a very powerful intuition pump. The standard way of thinking about development for most of the stakeholders is that people are stomachs. So governments, think-tanks, NGOs, etc are always worried how to feed people, what to feed them, and what jobs to give them. It is rare to see a framework that treat people as independent, free, and thinking people who do not look up to big brother to make a living and live their lives. Even rarer is a framework that admits that development and prosperity happen when policies create the right incentives for skills and creativity of people to be rewarded. We need to embrace a better intutition. An intuition that is humble enough to admit that no government or organisation can know what people want better than them. An intuition that is honest enough to admit humanity has only progressed when people are treated as brains.
see Chapter 8, page 146 of his book The Elusive Quest for Growth
This is reference to the theory of development advanced by economist Ricardo Hausmann, which I believe is correct.
A reference to the philosopher Dan Dennett. See his book Intuition Pumps and Other Tools for Thinking
"This is a very powerful intuition pump. The standard way of thinking about development for most of the stakeholders is that people are stomachs. So governments, think-tanks, NGOs, etc are always worried how to feed people, what to feed them, and what jobs to give them."
This is an excellent point.
People are not mere stomachs, but creative agents capable of producing.
The task for African govt is how to create an economic structure that enables and amplifies people's creative agency