17. Arrow, Kenneth J. Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity, Flashcards
(11 cards)
What is the main concern of Arrow’s paper on invention and economic welfare?
How resources should be allocated to invention, considering that invention creates information, which has unique economic properties.
Example: Deciding how much money to invest in inventing a new solar panel vs. making more of the current one.
Why does perfect competition often fail in allocating resources to invention?
Because invention involves uncertainty, inappropriability (hard to own ideas), and indivisibilities (ideas can’t be split easily).
Example: You can’t sell half a new idea or predict exactly how useful it will be.
What makes information a “special” kind of commodity?
It can be shared at near-zero cost, is indivisible, and once shared, it’s hard to control who uses it.
Example: Once you publish a secret recipe online, anyone can use it, and you can’t “unshare” it.
Why is invention considered risky economic activity?
Because you invest without knowing if the invention will work or be valuable.
Example: Spending years inventing a flying bike, only to find no one wants one.
What happens when inventors can’t fully profit from their inventions?
Society underinvests in research because inventors don’t see enough personal gain.
Example: If everyone uses your idea but you can’t charge for it, why spend time inventing?
Why is information hard to sell efficiently?
Buyers can’t know its value without seeing it—but once they see it, they may not pay.
Example: You don’t know if a joke is funny until someone tells it—then it’s free.
How do patents help with the information problem?
They create property rights, allowing inventors to profit—but they also restrict access, leading to underuse.
Example: A drug patent makes medicine expensive, even if many people need it.
What kind of inventions are most underfunded in private markets, according to Arrow?
Basic research, because its benefits are uncertain and hard to capture.
Example: Discovering atoms helped lead to tech later, but no one could patent atoms
How does monopoly affect invention incentives?
Monopolists have less incentive to innovate since they already profit without it.
Example: A phone company with no competitors might not bother making better phones.
What’s the ideal economic condition for invention, according to Arrow?
Inventions should be free to use, but inventors should still be rewarded, requiring public funding or clever incentives.
Example: Like paying people to write Wikipedia articles—even though it’s free for all to read.
What policy does Arrow suggest for improving innovation?
Government funding and centralized planning for basic research to correct underinvestment.
Example: NASA or NIH funding major science when companies won’t.
