This jumped out at me yesterday: a conversation between Tyler Cowen and billionaire venture capitalist Peter Thiel. Cowen is one of the most influential economists in the world, and he introduces Thiel as:
one of the greatest and most important public intellectuals of our entire time. Throughout the course of history, he will be recognized as such.
And then they talk about innovation and Thiel says:
There’s the question of stagnation, which I think has been a story of stagnation in the world of atoms, not bits. I think we’ve had a lot of innovation in computers, information technology, Internet, mobile Internet in the world of bits. Not so much in the world of atoms, supersonic travel, space travel, new forms of energy, new forms of medicine, new medical devices, etc. It’s sort of been this two-track area of innovation.
There are a lot of questions of what has caused it and I think maybe that’s a good part to start in terms of what gets you out of it. On a first cut, I would say that we lived in a world in which bits were unregulated and atoms were regulated.
If you are starting a computer software company, that costs maybe $100,000, to get a new drug through the FDA, maybe on the order of a billion dollars or so. If the FDA were regulating video game technologies, and you had to do a double-blind study to make sure that the video games weren’t addictive, damaging to your brain, etc.
Is government regulation really the primary reason there’s more innovation in software than biotechnology? Surely the big difference between the two is that from an engineering point of view, software code is the easiest material you can possibly work with. That’s what’s great about it. The barriers to entry are almost non-existent. You can develop something amazing in your garage and take it to market for about $100,000. Smart teenagers with laptops can just start messing around with software development tools and build stuff, which isn’t something that can happen in biotech. The smart teenager would need access to a multi-million dollar lab, and if they just started messing around in it they’d kill themselves very quickly.
Software can become complex, but working with it is easy. Pharmaceuticals, on the other hand, are just really hard to work with. You need labs filled with expensive specialist equipment, and lots of people trained to use it, and the biological systems that your product interacts with are many magnitudes more diverse and complex than the IT platforms that software interacts with. And, of course, there’s a regulatory burden because video games don’t cause birth defects or increase your risk of heart failure, or give you cancer. It costs virtually nothing to test a software product, but drugs mean large scale double-blind placebo clinical trials, and that’s just really expensive. Thiel is like a guy who watches someone build a sand-castle, and then points to a skyscraper and says, ‘Sand-castles are unregulated but you need a permit to build that, so skyscrapers are more expensive because of government regulation.’
Now, you’d think that a brilliant economist and ‘one of the greatest intellectuals of all time’ would realise all this, and you’d also wonder why they don’t. Cowen and Thiel are very smart guys but they’re also libertarians and that places a huge barrier of magical thinking between them and anything sensible they might say about issues involving government or regulation and markets. There’s a huge web of libertarian fantasy around free market alternatives to drug regulation, involving patients making rational choices about medication based on perfect information, and orphans sending price signals by winning tort cases against multi-billion dollar drug companies that accidentally kill their parents.
It’s all preposterous, but it matters because guys like Thiel are hugely influential among political and media elites. He made all that money! He must be right about stuff! But he’s not, and a lot of what passes for wisdom or insight among what Cowen refers to as ‘the hyper-meritocracy’ or ‘the cognitive elite’ is simply uninformed oblivious nonsense.