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

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."