As I read a recent issue of New Scientist this morning, I very nearly skipped over an article titled “Falling Out of Love With Market Myths” with a photo on the fold of Ronald Reagan walking with Margaret Thatcher. The title and presentation leads one to expect the sort of thing one would expect from British academic types, and ditto, check… the article was written by an Oxford educated academic named Terence Kealey, now a Vice-Chancellor at the University of Buckingham.
I plowed on any way and was rewarded by a very surprising statement:
In fact, the evidence shows otherwise. 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.
Surprising, that is, in the sense of being a key element of an article in New Scientist by a member of academia. It is a very interesting article and well worth reading.
Here he is giving a talk to the Oxford Libertarian Society on the same subject:
http://oxlib.blogspot.com/2009/05/myth-of-science-as-public-good.html
He wrote an interesting book a few years ago called Sex, Science and Profits which argues that govt-funded R&D is a waste of time and only private enterprise directs R&D into useful areas
Buckingham, being the UK’s only private university, is somewhat of a refuge for academics dissenting from the statist mindset which infests the higher education sector.
There’s no doubt about it, Terence Kealey is one of the good guys. Your own Brian Micklethwait knows it:
http://www.samizdata.net/blog/archives/2009/06/terence_kealey.html
Yippee.
It’s a pity that the government ignores this sort of finding.
The article actually is more radical than that: It’s a massive dissent from the neoclassical economic model, or what George Reisman, many years ago, called “Platonic competition.” And it explicitly recognizes that a lot of claims of “market failure” and calls for government to rescue us from the wicked free market are in fact made by entrepreneurs who hope to get richer off of government policy. There you have a couple of the better insights of the Austrian and Virginia schools with the labels carefully obscured to avoid frightening off leftist readers.
Well, the obvious counterargument is that the results of publicly funded R&D tend to be publicly available and easily transferable: so they don’t particularly help the country that spends its taxpayers’ money on R&D, but overall they have a positive effect on the global economy… Thus, as good citizens of the global community, all countries should contribute to the provision of this public good.
Yes this throws up all sorts of bugbears. Will private companies plough money into purely theoretical research which has no foreseeable practical or saleable application? It may be arguable that in the long term they have to, so as to have new theories to find practical applications for, but when have corporations thought any longer term than the end of the current financial period?
I realise that governments suffer the same short sightedness, but atleast they don’t expect as much of a return on their investment.
Noel C has already said what I was going to say.
It was the fashion (a few years) in libertarian circles to talk about how the effort to build an independent univeristy at Buckingham had “failed” and how we must just learn from the “mistake”.
However, this is only true if we compare Buckingham to an ideal university – if we compare Buckingham to the actually exiting other universities then it is place of good management and independent thinking.
Comparing to the ideal is useful for “how do we improve…” type thinking, but it can obscure the fact that something (such as Buckingham) is already far better than the actually existing alternatives.
For example:
“This car is not ideal” is true.
But “the alternatives the government is offering are much worse” is also true.
So, which yields a better return on the business dollar: a research scientist or a corrupt politician?
Great find! In addition to the empirics referenced here, the a priori argument against government funded R&D that I’ve been making for a long time now is:
Either funding R&D Project X would create value for us, or it wouldn’t.
If it would create value for us, then government funding is not necessary because the profit motive will incentivize its funding.
If it would not create value for us, then government funding is wasteful because we’re spending money on something that does not create value.
In either of two cases which are jointly exhaustive of the possibilities, the government should not fund R&D.
lukas – that was my first thought, as well. But glancing through the report I found it referred mainly to IT research, an area where the US leads in both academic and business R&D. This was shown to be a contributor to relatively higher economic growth in the US. If it was correct that higher academic R&D spending in one country caused equally large increases in economic growth in all countries, then we should have seen spillover effects from US academic IT research in all countries – yet the effects were concentrated in the US.
Thus, if US corporate and academic R&D primarily benefits the US, and
only corporate R&D benefits the host country relative to other countries, then:
it is US corporate R&D which is benefiting the US.
“Perfect competition” is indeed an absurd model – for example it assumes that all business enterprise have the same cost structure (which is absurd – as the basic point of running a business is to make it better than your rivals) and that everyone has full information (which is impossible). In real life competition is a “discovery procedure” of trying out new ways of doing things and trying to get information to potential customers. “Perfect competition” also has artifical constructs such as “normal profit” (that construct has to be there otherwise the mathematical stuff in the model would force average revenue, not just marginal revenue, down to average cost – which would mean that total profits = zero and all business enterprises would vanish).
Of course the “perfect competition” model also leaves out government failure.
“But the whole thing is just a tool to help understanding Paul – even establishment ecomomists do not believe in a all wise government that can improve on the market”.
Yes they do – see the first letter (from two “leading economists”) in the Economist magazine this week – the call for “adult supervision” of the market by the government.
What does that mean in reality?
Barney Frank is Chairman of the House Committee that would be in charge of such “adult supervision” and Christopher Dodd is Chairman of the Senate committee. And the head of the Executive branch is Barack Obama.
None of these three men have worked (they have all either been in government or been “activists” their whole lives) and none of these three men has ever allowed a critical thought to enter their minds – instead they have accepted every bit of collectivist dogma their “elite” universities have taught them.
Barney Frank, Christopher Dodd and Barack Obama are corrupt and they are collectivist – but they are not in any but a sexual sense “adult”.
So even if government could generally improve on “market failure” by “supervision” (which it can not – it can only make things worse), these people would be the last people on Earth one would give the power to supervise the market to.
Yet the “leading Economists” assume all this away and assume noble and all knowing rulers.
Brilliant post, Paul.
The second half of the article is good. The first part contains some appaling economic howlers. The biggest is the assertion that the strong form of the efficient market hypothesis was invented to justify high salaries for traders and the rich getting richer (exactly the same assertion was made by Anatole Kaletsky a while back).
Of course the strong EMH implies exactly the opposite. If it holds you may as well employ a bunch of people on minimum wage to trade for you (prop trading that is, as distinct from market making).