Economics and Cosmology

On Monday of this week, Paul Krugman wrote in the New York Times that the income disparity we currently see is not due to the increasing leverage of education as had been suggested by new Fed chair Ben Bernanke but rather a result of the recent rise of a narrow oligarchy. He points to data showing that only those with incomes in the 99th percentile were really reaping the benefits of increased productivity. College educated people in fact had lost real income in recent years. In an earlier post, I pointed out that the top 400 richest Americans make up of 1% of the entire U.S. GDP.

The prevailing supply side mantra is that “a rising tide floats all boats. ” The theory is that increasing wealth at the top will lead to greater investment and higher productivity to which the entire nation will benefit. Unfortunately, this is thinking linearly and not exponentially. When I briefly flirted with Wall Street a decade ago, I was amused to learn that finance was similar to cosmology in that both fields involve stochastic fluctuations on an exponentially expanding manifold. The implication is that small differences will eventually lead to huge differences and this could be an explanation of both galaxy clustering and the growing income disparity.

Only small inhomogeneities in the initial conditions and growth rate can lead to wide disparities in wealth. This is especially true because we must compare all rates against the inflation rate. If you’re growth rate is below inflation then you’re wealth is essentially heading towards zero. Taxes can serve as a means to slow down the growth rate and nonlinearly saturate the growth for those with great wealth. Cutting taxes on income from capital gains and dividends, which mostly apply to those with disposable income, will only further accelerate the disparity between the rich and poor. The only solution is to try to keep the individual income growth rates as homogeneous as possible and above inflation. Trying to equalize initial conditions (i.e. current wealth) may be harder to achieve politically.

The Greenspan strategy was simply to try to keep inflation in check. However, I think we need to manipulate our current tax system to alleviate the problem. Perhaps we could have a floating tax rate that is calculated on the fly to partially homogenize everyone’s growth rate. Another option we could explore is to tax wealth directly rather than income. The one thing we cannot do is to stay the current course.

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Patent Law

For all those addicted to blackberry wireless email, U.S. District Judge James Spencer ruled out an immediate injunction on the service. This case shows how dysfunctional the whole patent system has become. A Virginia-based patent holding company NTP Inc is claiming that Canadian-based RIM has infringed on five patents to operate the blackberry system. The judge has ruled that he accepts this claim although he’s not quite ready to pull the plug today. A collective sigh of relief could be heard across the country from millions of “crackberry” users including many in U.S. federal departments like the CIA. RIM has taken a counter offensive and challenged the validity of the patents. The U.S. Patent and Trademark office has thrown out one NTP patent already and RIM claims it has now issued rulings invalidating the other four as well.

I can see how a patent is essential to allow a small fledgling company with a great new idea to get a foothold on the market before another bigger company can step in. However, it is another matter to take out a patent on an obvious idea and then sit on it so you can later sue some other company that takes the time and investment to make it commercially viable. The whole concept of a patent holding company is repulsive to me. Now, every software and biotech company is looking over its shoulder to see where it may be blindsided by some overly general patent issued years earlier. Instead of encouraging innovation and development, the current laws discourage it.

The entire U.S. patent system needs to be overhauled. It is plainly ridiculous to allow patents on DNA sequences or trivial ideas like ‘one click’ purchasing on a website. It doesn’t take a genius to think of wireless email. However, it was RIM that actually got it to work and have it be universally adopted. I think software is intrinsically different from say mechanical devices in that the source code can be kept a secret. For example, it would be like someone patenting a lawn mower but not disclosing the mechanism. The concept of a lawn mower should not be patentable, only the implementation. But that is exactly what is happening for software. I think software patents could have a place but they must be held to a higher standard. A patent should only be protected if a company clearly has a head start using it over some other infringing company. If someone just sits on a patent, they should get no protection.

Free Speech

This current uproar over the Danish cartoons has gotten me to think about what is free speech. It certainly doesn’t mean you can say anything you want. Clearly, laws against slander and libel do not violate the Constitution. Hate speech also does not receive First Amendment protection. The 1942 Supreme Court decision Chaplinsky v. New Hampshire decided that “fighting words”, which incite an immediate fighting response “are no essential part of any exposition of ideas, and are of such slight social value as a step to the truth that any benefit that may be derived from them is clearly outweighed by the social interest in order and morality.”

If free speech doesn’t mean you can say anything you want with impunity then what is it exactly. My personal view is that free speech is not a free pass to express any thought but a safeguard to protect those that lack power to criticize those in power. So a governement scientist should be able to complain that science is being distorted for political ends without the fear of losing his job or a newspaper should be able to claim that a certain politician is corrupt without the fear of being shutdown.

Should European newspapers be allowed to print cartoons that are inflammatory towards Muslims? Having not seen the cartoons, my assumption is that the intention was to criticize certain elements of the Muslim world for using religion to incite violence. However, given that images of the Prophet Mohammed are deemed sacrilegious, I think this could have been done in an editorial essay. The Muslim community is clearly marginalized in European society so this is not the same as say burning the US flag. Also, given that there are laws against denying the Holocaust in many European countries, I think banning images considered sacrilegious to Muslims would not be inconsistent. I am a proponent of free speech but I do believe there can be limits.