How MIT is going to kill scientific innovation in America

This is a quick one.

I found the blog Noahpinion as I was following a link from a silly article in The Atlantic from assistant finance professor Noah Smith at Stonybrook who thinks what the country really needs is 50 million more Asians.  Having worked with Asians I can tell you that they’re just like any other immigrant group.  Some of them are brilliant, some are average and some are highly overrated.  And just like other immigrant groups, many of them work incredibly hard when they come here.  But with so many of them laid off right now in my industry, I don’t think even they want 50 million more of them landing on our doorstep.

How would Noah Smith like it if there was another continent called Financia and, having an excess of well-trained finance specialists, they all wanted to move here and teach finance?  Not only that but because they stand out in a crowd with their blue hair, the hiring managers become fascinated with them and their well tested ability to express multivariate statistics without a calculator?  How many adjunct professors could Stonybrook absorb?  Think that over, Noah, and then, maybe you should get out more and see how the pharmaceutical industry and its hundred thousand of unemployed scientists are doing.  I think we can dispense with the notion that we’re all bad scientists because we didn’t get laid off piecemeal.  It was 19,000 at a clip.  Hardly discriminating, wouldn’t you say, Noah?  The last thing we need is more unemployed scientists who will work for peanuts.  I think there’s a finance paper in that somewhere.

Which brings me to the article that Noah discusses on his blog.  It’s about a paper written by Daron Acemoglu and James Robinson about how all you really need to be a successful entrepreneur is an excess of hard work!  Go Team America!  I won’t even go into all of the details right now because it would take too long and my blood pressure wouldn’t like it.

Noah gets how faulty the reasoning is in this paper:

Given these assumptions, the result of the model is not hard to predict – when you let losers lose and winners win, innovators try harder. Not exactly a shocker, given the assumptions.

So is this model counterintuitive? I argue: No. Instead, it is intuitive. It seems to have been built using intuition, and its results confirm commonly-held beliefs about the difference between “cutthroat” and “cuddly” capitalism. So I don’t think it makes much sense for Acemoglu and Robinson to defend their research from the bloggers by saying that the purpose of academic research is to be counterintuitive.

OK, time for my second point. Mark Thoma wondered why Acemoglu, Robinson, and Verdier get the result they get. Isn’t it true that entrepreneurs have to take a lot of risk? And doesn’t that mean that social insurance, which reduces risk, should encourage entrepreneurs to take more risk, not less? How is it that Acemoglu et al.’s model avoids this effect?

Here is the answer: it’s built into the math. The authors assume that the only cost of entrepreneurship is effort. From the paper:

We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship[.]

In other words, the authors have assumed away much of the risk of entrepreneurship! A failed entrepreneur gets paid exactly the same wage income as a worker who doesn’t try to be an entrepreneur at all! This automatic wage income reduces the risk of entrepreneurship substantially, and makes social insurance much less necessary for reducing risk.

How realistic is that assumption? Well, in the real world, entrepreneurs in rich countries have limited liability, and can pay themselves wages out of their start-up capital. This means that many entrepreneurs can earn a wage even as they work to start businesses. But this wage is often much less than they could have earned otherwise, and if their business fails (a statistically likely event), they will be unemployed. So the “no occupational choice” assumption probably reduces the risk of entrepreneurship, relative to the real world.

Also, the authors assume that entrepreneurs do not put up any of their own wealth as startup capital for their ventures, and they assume no heterogeneity between worker/entrepreneurs. This means that it is just as easy – and no more risky – for a poor person to start a successful company as for a rich person to do so.

So to sum up my second point, Acemoglu, Robinson, and Verdier have assumed a model in which:

• Entrepreneurship is low-risk,
• Rich people have no advantage over poor people when it comes to starting companies, and
• Your probability of success depends entirely on how hard you work.

(No wonder liberals were not happy about this model, eh?)

So to combine my two points: When it comes to this kind of modeling, what you get out is pretty much what you put in. If you start off with the intuition that success is a function of how hard you work, and how hard you work is a function of how much the government will let you keep your hard-earned gains – in other words, if you start off with the intuition of pretty much every middle-aged conservative guy in America – then your model will probably spit out the result that countries face a tradeoff between redistribution and innovation…again, fitting perfectly with the intuition of pretty much every middle-aged conservative guy in America.

Pretty much.  Let me just add that the likelihood of this miraculous success coming out of the biotech world from all of the laid off scientists who don’t have the money for the start up costs to become entrepreneurs is vanishingly small.  You might be able to make this case of Silicon Valley type entrpreneurships.  In that case, coding and building new hardware are fairly predictable kinds of endeavors.  You *can* work extra hard and code yourself into exhaustion and the results of your coding depend solely on your energy level and cleverness.  You *can* design the next great iPhone device given Moore’s Law and the industrial engineers at Foxcomm who will rejigger the machines to your exacting specifications.  But this doesn’t work in biotech or pharmaceuticals because we don’t know what the f^(* we’re working with yet.

What the finance people don’t seem to get yet is that if they force the scientists into the entrepreneur environment without a safety net of any kind, they are going to get back LESS, not more innovation than they would have gotten than if they had provided us with steady salaries over a long period of time.  The problem is that it is hard to prove a negative.  There will be some innovation.  Some people will get lucky, independent of how much work they do.  Some people will have a breakthrough and it will seem miraculous.  The problem is that biology is so big and contains so many unanswered questions that the number of innovations that come out of just allowing people to work themselves to death without any visible means of support is going to be tiny compared to what the actual output could be.  And maybe that’s not important to the financiers who only want a handful of blockbuster drugs to make their billions off of.  But for patients with crippling diseases of all kinds, this period of just letting hard work be the main propulsion for innovation is going to be a tragic missed opportunity.

For some inexplicable reason probably having to do with the necessity of rationalizing why financiers and shareholders should take everything that isn’t nailed down to the detriment of everyone else’s livelihoods, the middle aged conservative is convinced that the rate limiting step when it comes to biotech is hard work.  If only those overpaid scientists would get off their fat asses and crank out more stuff or whatever it is they do in those labs, there would be more innovative discoveries to sell!  What’s really amazing is that they seem to have forgotten the billions of dollars large companies have spent on research on drugs that were never approved.  How is cutting back the research budget to zero supposed to work anyway?? One of these days, the middle aged conservative guy’s perspective is going to become discredited.  It will happen just about the time France and Germany become the world’s leaders in biotech.  While we starve the innovators, the cuddly governments will keep the fires going, allowing more innovation to happen without killing the innovators from exhaustion and bankruptcy.

Why wait?  Why not just have the government step in now and put our scientists to work?  Pay them decent salaries, put a floor beneath them so they don’t fall through it and fund research.  Sooner or later, it’s going to have to happen.  It is time for American finance people to come to terms with biological research as being a fixed cost, not a variable one and certainly not one that can do it all by itself.  Ain’t gunna happen.

Meanwhile, Derek Lowe at In the Pipeline reports on the latest casualty of the entrepreneurial biotechs:

It hasn’t been good over at Targacept. They had a big antidepressant failure a while back, and last month ended development of an ADHD drug, the nicotinic acetylcholine receptor ligand TC-5619.

They cut back staff back in the spring, and the CEO departed. Now the expected has happened: the company has apparently laid off everyone in research, and is conserving what cash it has to try to get something to the deal-making point. A sad, but familiar story in this business. . .sometimes companies come back after this point, and sometimes the event horizon turns out to have been passed.

More hard workers, probably a lot of Asians, scrambling for work on a daily basis is not a winning formula.

Saturday: Bureau of Labor Statistics Completely Misses Meltdown in R&D

Last week, my lab partner and I sat in on a webinar from the American Chemical Society (ACS) discussing employment and employment trends of its members.  Now, the fact that the ACS is even having a webinar like this is significant.  It’s because so many chemists are out of work.  In previous recessions, this bloc of well educated, technically savvy workers was able to weather the economic downturn relatively well.  Not this recession.  Now, our trend lines follow the rest of the country’s workers.  We’re not as badly off as workers without college degrees but there is no doubt that the ACS sees ominous signs that there is a decline in our ability to put our degrees to work for us.

There were two dudes from the Bureau of Labor Statistics on hand to give the government’s outlook on employment for our sector.  And by and large, they were useless.  Problem?  What problem?  According to the BLS, our sector is experiencing a minor blip of something like 3.8%.  The ACS only shows a 5+% unemployment rate.  Why are you chemists belly aching?  And look!  If you switch to biochemistry and biophysics, your sector is going to be booming right up into 2018.  Oh, sure, if you’re a chemical engineer, life sucks for you -because we’ve moved production facilities out of the US.  Ever wanted to get your drugs from Canada?  Well, now you can.

The questions that came from the audience demonstrated confusion.  Those numbers are not what *we’re* experiencing.  Just about every R&D chemist I know is unemployed right now.  The pharma sector, despite what might be your personal distaste for the sector, has laid off more than 100,000 people since 2008.  Pfizer alone laid off 19,000 people last year including nearly all of the chemists at Wyeth with whom they merged in 2009.  Pfizer is preparing to lay off more this year and ship some of the rest to Cambridge, Massachusetts.  Presumably, those are the chemists that can switch to biochemistry and biophysics.  Really, guys, it’s not that hard.  OK, it was grueling but very rewarding.  I did it last year.  Then *I* got laid off.  D’OH!  But the carnage is not limited to Pfizer.  They’re all doing it.

The general impression I got from the BLS guys is that they really don’t know anything about this sector.  They admit that they haven’t updated their subcategories for the sector since 2007 and aren’t scheduled to reclassify them until 2012.  The predictions they are making about the sector for 2008-2018 are based on statistics gathered prior to the financial collapse of 2008.  By the time the BLS catches up, it will have missed the hollowing out of the R&D due to the financial guys eating what they kill.  The BLS also doesn’t seem to have a category for R&D chemists.  We’re considered “manufacturing”.  Because we’re not in academia?  I don’t know.  It seems very vague and indistinct but apparently, some miracle is already in progress and we are all shortly to be gainfully employed making antibodies.

The ACS is not a whole lot better off.  Many of the people in their target audience who participate in their annual survey of employment no longer get email from them.  It’s hard to reach people who are no longer employed.   It’s also hard to justify paying your ACS dues if you need to pay your car insurance and you aren’t getting an income.  Better to borrow a copy of C&E News from a friend who still gets it, provided you can still find someone who isn’t in the same boat you’re in.

Here’s what the people on the inside of the industry are seeing: small molecule chemistry in this country is dead or dying.  The money guys have decided that making new small molecule drugs is too risky.  Or expensive.  They are shipping the small molecule synthesis overseas to Chindia or to countries where the labor laws protect workers better.  The industry is pulling out of traditional medicines and investing in biologicals.  That’s because biologicals have better patent protection (well, at the *present* time.  Politics being what they are and pharma being indiscreetly reviled amongst Democrats could change all of that.) But biologicals are going to be expensive too and there’s no guarantee that the end result is going to provide better therapies.  The risk is still high but not as high as it is for traditional medicines when it comes to money.  So, the money is going to biotechs and R&D is bugging out of some geographical locations to be crammed into Cambridge, MA.  You want to know where our best employment prospects are?  China.  Yep, there’s an inexplicable shortage of R&D chemists in a country with 2 billion people.  Even China can’t keep up with China.

Also, the finance guys continue to blame the researchers for the lack of new drugs in the pipeline.  What the finance guys either forget to mention or don’t know is that researchers work their asses off for new drug entities but the bar for approval by the FDA keeps getting raised.  It’s getting harder and harder to make a drug that has zero risks for patient, lawyers and shareholders.  It doesn’t help that the industry has been careening from mergers and acquisitions, new technologies, management theories (that are really not helpful, guys), outsourcing and the thirst for “get rich quick” schemes that would put Ralph Cramden to shame.  Everything that has been going on for the past 15 years that has sucked the life out of research has been on warp hyperdrive since 2008.   What would make the industry more profitable is for research companies to take the long view, buck the pressure of the finance guys and have patience so that research productivity can actually happen.  Merck is one such company.  But Merck is an exception under pressure.  Long term thinking can’t happen when we have financialized our own retirements with a 401K system and a roulette wheel of high stakes brokerages and quants.  We expect our investment portfolios to keep increasing indefinitely and some of those profits come at the expense of our own jobs.  In effect, we are our own worst enemies.

Meanwhile, R&D infrastructure is going to continue to melt away.  The chemists thrown out of work today won’t find a job for a mean of 11 months.  They may not be able to find a job in biotech.  With so many of them out of work, employers can be very persnickety and choosy.  And with the fast pace of scientific discovery these days, it’s hard to keep skills and knowledge fresh and current without practice and access to scientific journals.  In short, we’re doooomed, both on a personal professional level and as a country that used to take pride in its R&D leadership.

But the country and it’s lawmakers won’t know that for several more years if the BLS has been feeding them stale statistics.  They’ll keep partying like it’s 2007.

In other news:

The Irish have had it with their incompetent and bank loving sycophantic government. Fianna Fail, the party that has been in charge for the last 60 of 80 years, has been crushed in the latest election:

“I think Brian Cowen was probably the worst taoiseach we’ve ever had,” said David Ryan, 76, a retired businessman, using the Irish word for prime minister and speaking of Fianna Fail’s former leader. “I am totally angry,” Mr. Ryan went on — not just at Mr. Cowen, who resigned last month, but at the Irish banks whose spectacular debts his government promised to guarantee on a fateful day in 2008. “They were totally corrupt.”

Yes, if you screw your citizens to prop up corrupt and criminally negligent banks, you will be politically annihilated.  Hmmm, this next bit is interesting.  You could substitute “American” for “Irish” and either one of our parties for “Fianna Fail” and it would read just as well:

Unemployment is up to 13.8 percent (it was as low as 4.2 percent as recently as 2005); public spending has been savagely and repeatedly cut since 2008; the deficit has risen to 14.3 percent; and current predictions suggest that 100,000 people will emigrate in the next several years, from a population of 4.3 million. The bill from the struggling banks may, in the end, total upward of $135 billion 100 billion euros,Ö in an economy with a G.D.P. of $220 billion 160 billion euros.Ö

The housing bubble that fueled the boom has collapsed, along with the banks that made the loans that led to it in the first place. In November, the country was forced to accept a humiliating and onerous $92.8 billion 67.5 billion euro international loan package that tied it to a brutal four-year austerity program. The package came with such unfavorable interest rates that some economists feel the country might be unable to afford even to service the debt.

Many of these problems can be directly attributed to poor decisions made by the government, said Diarmaid Ferriter, a professor of modern history at University College Dublin. “There has been a complete and utter lack of leadership in Ireland,” Professor Ferriter said. As for Fianna Fail, he said, “They’ve actually managed to alienate all sections of our society.”

The question is, do the Irish have someplace else to go?  Do Americans?  Because I see Obama going the way of Brian Cowan.  The jig is up.  And the Republicans better not get too comfy either.  2012 could be a major game changer.

Sunday: Bad Bank

Take the red pill and go down the rabbit hole

Knowledge is power, Conflucians.  When it comes to the economy, I feel like a novice.   Playing with money never interested me.  It was enough to diversify my options in my 401K and leave it at that, although, I had a sneaking suspicion in the back of my mind that I should learn what it was they were up to.  But I opted for a degree in chemistry, not finance.  The truth is, it isn’t possible to know everything about everything.  There are limits to how much time out of our very busy lives we can dedicate to learning someone else’s area of expertise.  That has always been the danger of the 401K, IRA and pie-in-the-sky Grover Norquistesque wetdream of private Social Security accounts:  We’re busy and we have to trust people to handle our money responbsibly.   Needless to say, they’ve really let us down and now we are faced with the sometimes overwhelming task of learning the rules of  this high-stakes financial risk game.

The past several months have left me feeling a bit like Neo in the Matrix after they pulled his headplug and the world is revealed as it truly is.  I should have taken the blue pill.  What I see is not pretty.  I see a lot of shallow CEOs, oblivious to the fates of the people whose money they are entrusted with, determined to protect their lifestyles at any cost.  I see traders, addicted to adrenaline, looking for fixes and laying our nest eggs on the line for the rush of a big payoff.  I see corporations walking away from their future obligations because the people who work for them put their faith in them and deferred their compensation for promises that were never meant to be kept.  I see a government that was bought and paid for by these people and who will sacrifice the working class to pay its debt to its backers.  I see a Whole Foods Nation that doesn’t realize that it entered the ranks of the working class a couple decades ago in the era of Reagan’s “voodoo economics”.

You can’t be too careful these days.  If you want to know how to protect yourself from the predators who, in the end, are really no better than the common thugs who rob you at gunpoint, you’ve got to learn how to avoid the financial dark alleys. I’m so glad that we have Dakinikat to help explain stuff like “moral hazard” and “collateralized debt obligations”.  We have Paul Krugman, NakedCapitalism and Baseline Scenario who are keeping their ears to the ground and interpreting the entrails for us.  And we also have Planet Money and This American Life who are teaming up to break down the complex so we all get it.  Tonight, their joint project called Bad Bank airs on NPR and PRI stations at the This American Life regular time slot.  You can catch the podcast here or check your local NPR station.  The feed from WNYC starts at 4:00PM EST.  I urge everyone who has a mental black hole where their finance center should be to tune in for Bad Bank.

It’s time they stopped playing us for suckers.