Say It Ain't So — Government R&D Funding Slows Economic Growth!

Ronald Bailey | July 29, 2009

Terence Kealey, who is a biochemist* and the vice-chancellor of Buckingham University in Britain, writes a remarkably interesting column in the current issue of the New Scientist. Here is the nub of Kealey's argument that government R&D slows economic growth:

In 2003, the Organisation for Economic Co-operation and Development published The Sources of Economic Growth in OECD Countries, reporting on a comprehensive regression analysis of the factors that might explain the different growth rates of the world's 21 leading economies between 1971 and 1998. This indicated that only privately funded R&D led to economic growth, and that publicly funded R&D did not. Worse, the public funding of R&D crowded out private funding, and thus slowed economic growth.

This is because, as scholars such as the late Edwin Mansfield of the University of Pennsylvania tried to show, the assumptions of the "perfect market" are false when it comes to the spread of knowledge about innovations. The copying of innovations is actually very expensive because it requires the acquisition of the relevant tacit knowledge - the sort of knowledge that cannot be transferred as a neat unit. The direct costs of copying an innovation are, on average, some two-thirds of the cost of creating it from scratch. Add to that the cost to the copying companies of employing their own scientists and their own infrastructure, and the average costs of copying a new product match those creating it originally.

In research, new knowledge spreads. Researchers read papers and patents, talk at conferences, and analyse their competitors' products. But this spreading of knowledge is actually a sharing of knowledge, and on average the amount of knowledge a company or scientist disseminates freely is balanced by the knowledge it or they import freely. Indeed, scientists - even from competing companies - meet at conferences and other venues to exchange ideas for mutual advantage. This is why sociologists say science is organised in "invisible colleges". The idea of market failure in knowledge and science is therefore wrong - though it persists universally in research-based enterprises.

Whole Kealey column can be found here. See Reason's reviews of Kealey's book, The Economic Laws of Scientific Research here, and our review of his latest book, Sex, Science and Profits here. See also my recent article "It's Alive!" on my experience as a young energy regulator overseeing some energy R&D under the Carter administration here. 

*Typo corrected from "bochemist."

Comments

|7.29.09 @ 12:06PM|#

Ron,

Terence Kealey, who is a bochemist

Biochemist?

Rimfax|7.29.09 @ 12:13PM|#

I knew a bochemist once. Man, that was some wicked 'shine!

|7.29.09 @ 12:20PM|#

Relying on OECD paper-shufflers to understand the role of research in the long term development of useful products and services = EPIC FAIL. That degree in international relations isn't going to help you understand how NIH funded basic science eventually leads to pharmaceuticals and diagnostic systems.

I've never even heard of Buckingham University anyway.

|7.29.09 @ 12:22PM|#

Bochemist is a word, you morons. It means a mist made out of French cabbage.

kinnath|7.29.09 @ 12:25PM|#

This is overly negative.

The feds spent billions putting up satellites and funding military product development for GPS.

A decade later, privately-developed technology appears without government funding to provide GPS in wide variety of consumer devices including cell phones.

Sure, the money the feds spent to put of the GPS constellation could have been spent in the private sector. And maybe, this money would have resulted in stuff that was cooler and more vital to everyday life than getting turn-by-turn directions to the nearest pizza joint.

The real problem is public R&D that crosses the line into areas of research that have no direct defense/public-safety application and that should be left solely to the private sector.

|7.29.09 @ 12:25PM|#

So Terence Kealey is a mist made out of French cabbage? Who gives a fuck what he thinks?

|7.29.09 @ 12:33PM|#

SugarFree,

Exactly. Which is the subtle point of this post.

The problem with government R&D is that actual research virtually always takes a back seat to political interests--creating or maintaining jobs in a particular locality, politicians desiring the illusion of "doing something", paying off corporate supporters, etc.

robc|7.29.09 @ 12:39PM|#

I dont know which is dumber - the article or the comments.

|7.29.09 @ 12:43PM|#

Why can't it be both, robc? Why is your worldview so rigid?

When is the beer competition you have four entries in?

DADIODADDY|7.29.09 @ 12:44PM|#

Both

robc|7.29.09 @ 12:51PM|#

SugarFree,

They cant both be "dumber". Dumber is relative.

State Fair is, um, whenever out state fair is. Judging is August 16th, fair starts later that week I think.

robc|7.29.09 @ 12:52PM|#

SugarFree,


It's Your Fair,
August 20-30, 2009

Mark your calendars now for the Kentucky State Fair, August 20-30, 2009.

The Kentucky State Fair defines the Bluegrass State like no other event! This unique festival is 11 consecutive 16-hour days of non-stop excitement for the entire family - and you're invited to be a part of it!


I figure it is your kind of event. :)

Matter Monkee|7.29.09 @ 12:53PM|#

That report looks far too long to read but It'd be interesting to see if they've separated publicly funded R&D into each of its constituent sub-classifications

Most privately funded R&D is applied science, directly aimed at improving or generating a new product

presumably stuff like climate change research is actually intended to decrease economic growth! (sorry couldn't resist)

But realistically, a lot of publicly funded research like theoretic physics, marine biology etc may never lead to the development of a market product, and it isn´t intended to.Its more to expand humanities understanding of the universe

If they are weighing all publicly funded research and not just the applied science stuff against privately funded research they're bound to get to come to this conclusion.

robc|7.29.09 @ 12:54PM|#

The Kentucky State Fair defines the Bluegrass State like no other event!

Overweight rednecks wearing inappropriate clothing?

So how does it define it more than Thunder or the White Trash Expo* in Frankfort.

*It has another name, but I dont know what it is

|7.29.09 @ 1:00PM|#

robc,

Aw, crap. That's right when the wife and I are the busiest for work. It's hard to get her to go to State or County fairs, anyway do to her baffling lack of interest in fried foods.

|7.29.09 @ 1:11PM|#

...a lot of publicly funded research like theoretic physics, marine biology etc may never lead to the development of a market product...

Confounded long and variable lags, the bane of regression analysis everywhere!

EscapedWestOfTheBigMuddy|7.29.09 @ 1:44PM|#

The claim is that a regression analysis was done, and that no correlation was found.

Note that this claim---if true---doesn't care a whit about mechanism. There are no assumptions about how government R&D money eventually gets out to affect the larger economy.

The only questions answered is "Is there a correlation?"

Now, there are a lot of reasons to be careful with regression analysis. Starting with "correlation does not imply causation" and working up from there. In this case the question of time frame may be very important (and I see that some fed beat me to this punch, damn it), but there is no point saying "but you don't understand the mechanism". This type of analysis should work for any mechanism.

Andrew|7.29.09 @ 1:51PM|#

Kealey speaking on science funding at Oxford University a few months ago:

http://oxlib.blogspot.com/2009/05/myth-of-science-as-public-good.html

Sean W. Malone|7.29.09 @ 2:20PM|#

I read skimmed Kealey's article just now, and I couldn't get past how banal his characterization of economics & markets were.

As much as I want to support the idea that Government R&D funding slows economic growth, and I have no reason to believe that it wouldn't, Kealey's inability to understand that market competition does or knowledge does not need to be "perfect" in order to make markets far more efficient than central planning completely undercuts any point he might make later.

That's a bullshit strawman, and I'm not a fan. It also ignores the massive role of government in obfuscating market signals which would provide a lot better information to people in their absence. Yes, people make mistakes and sometimes behave in ways that seem "irrational", but if you look at the current crisis, I can't see anyone who behaved irrationally given the incentives at all.

And robc - I asked you yesterday, but where can I buy some of your Hefeweizen?

bloodstar|7.29.09 @ 2:38PM|#

Damn the Government for doing all that R&D to get to the moon, had they not, we would have gotten there in the 50's!!!11oneelventyone!

|7.29.09 @ 2:48PM|#

Well, bloodstar, I note that the Government has spent hundreds of billions on R&D, aerospace R&D even, since the '70s, and that we could not put a man on the moon today.

Coincidence? Maybe.

TallDave|7.29.09 @ 2:49PM|#

This indicated that only privately funded R&D led to economic growth, and that publicly funded R&D did not.

This should be obvious. Government funds projects based on politics, not the possibility of producing a service or good people will pay for. Thus we pay for crap like Gender Studies and the ITER tokamak fusion boondoggle.

Damn the Government for doing all that R&D to get to the moon, had they not, we would have gotten there in the 50's!!!11oneelventyone!

The free market would have asked "Is there any benefit of going to the Moon that justifies the exorbitant cost?" The answer is no, but politically it was useful.

old codger|7.29.09 @ 2:50PM|#

Going to the moon was defense spending.

|7.29.09 @ 3:22PM|#

A. Small sample size.

B. Correlation != causation.

|7.29.09 @ 3:25PM|#

"Thus we pay for crap like Gender Studies and the ITER tokamak fusion boondoggle."

Do you seriously think that projects like tokamak fusion (or the LHC) don't generate demand for commercial products and technologies and tools that would be used in the project?

robc|7.29.09 @ 3:36PM|#

Jon,

More demand than the demand for porn and snacks that would have been generated if the money had been left in the taxpayers hands?

robc|7.29.09 @ 3:37PM|#

I guarantee there was more transactional loss going from taxpayer to government to ITER to parts producers than from taxpayer to Larry Flint.

Warmongering Lunatic|7.29.09 @ 5:01PM|#

Damn the Government for doing all that R&D to get to the moon, had they not, we would have gotten there in the 50's!!!

Oh, yes, what a wonderful success. As a result of the Apollo program, we have the exact same capabilities to go to the moon today that we had in the 1950s.

|7.29.09 @ 9:35PM|#

Correct me if I'm wrong, but isn't the Augustine Commission about to tell the world that the private sector should be handling access to Earth orbit?

EscapedWestOfTheBigMuddy|7.29.09 @ 11:18PM|#

B. Correlation != causation.

But lack of correlation is pretty damn suggestive of lack of causation.