In a little-noticed speech on May 16th, Chairman Bernanke made a pitch for more government funding of research and development as a way to upgrade US productivity and growth through more and better technology. He cited existing US efforts to support scientific and technical research by the National Science Foundation and R&D tax incentives. His rationale for more government involvement is that in its absence the private sector won’t supply adequate amounts of fundamental research. The reason is that the full economic value of basic research may not flow to the discoverer, especially when the work is widely disseminated and easily replicated. He cites as an example Watson and Crick, who first correctly identified the structure of DNA, and received only a small portion of the benefits that it spawned.
The question is whether this is a good idea, and if so, where should efforts be directed, how does one measure and assess success, and how does one judge whether there is enough basic research? These are the key policy issues. Unfortunately, Chairman Bernanke bypassed most of them in his speech.
Do we really want government to essentially be put in the business of picking winners and losers when it comes to innovation? The Chairman notes, for example, that the government’s efforts to promote energy research in the 1970s were less than totally successful. On the other hand, he cites advances in healthcare and agriculture as positive examples of where new technologies benefited from government support. That support resulted in benefits, such as the eradication of smallpox and malaria. However, such activities are ones with clear ex ante positive externalities if successful. Nevertheless, more people benefitted and more lives were saved by public health efforts to provide potable water and adequate treatment of sewage than from all the medical advances for treating individual ailments.
More recently, we have the government subsidies to promote the growth of technologies to convert corn into ethanol. However, many, including Cumberland’s CIO, David Kotok, have argued that the effort has had disastrous effects on world food costs and has been at great cost to US taxpayers.
Agriculture is a particularly interesting case. At the turn of the century, from 1800 to 1900, it took one person to feed two. Now less than two percent of the population is engaged in agriculture. Productivity has increased tremendously due in no small part to government research and related support. Due to this productivity, the US share of world agricultural output has been well maintained, ranging between 11.5% and 7% since 1970. Meanwhile, tax dollars have been spent to take land out of production and to support crop prices. The result has been a redistribution of wealth from US taxpayers to fewer and fewer farmers.
How can government reasonably play a role that generates positive externalities efficiently while avoiding negative externalities, as in the ethanol program, and higher costs to taxpayers? Part of the answer lies in more carefully distinguishing support of the invention of new technologies from innovations that put those technologies to use for business purposes, a distinction that tends to get muddled in Chairman Bernanke’s piece. Productivity increases, the kind Chairman Bernanke is looking for, come more from innovations than from new inventions.
Let us cite some specific examples to sharpen this distinction. The invention of the electric motor has been widely citied as one of the most important inventions of the 19th century. The first DC motors were invented in the early 1830s but were not commercially viable. Even the first AC motors, invented by Tesla in 1888, were highly inefficient and didn’t become a success until it was recognized that the air gap between the rotor and stator was of critical importance. We now employ all sorts of electric motors in ways that have arguably changed productivity and the whole of society. It was the innovative application of the invention that created changes, not the motor itself. Similarly, the transistor, one of our most important inventions, has made everything from small radios and TVs to today’s powerful computer chips possible. Without the transistor, computers as we know them would not be possible, both because of the size of cathode ray tubes and the heat they generate. Again, it was the innovative application of the transistor that was the key to increased productivity and the creation of new products. By the way, both the transistor and electric motors were developed in the private sector without government funding. It is not at all clear that the inventor of the transistor has or should have had a significant claim on the value associated with its many applications.
A more recent and significant invention is the light-emitting diode, or LED, which was invented in the private sector by a student of one of the inventors of the transistor. Yet again, it is the commercial application of the LED that gives us the gains in efficiency, not the invention itself. The LED is now widely used in automobiles, TVs, clocks, and many other innovations. It may soon replace the incandescent light bulb and be a huge energy saver for the US.
The space program is often cited as an example of a government program that gave us many important inventions, including the chemistry used in kidney dialysis machines, CAT scans, magnetic resonance imaging (MRIs), freeze-dried food, cordless power tools, disposable diapers, fiber optics, bar codes, the ear thermometer, fire-resistant fabrics, the smoke detector, and thermal clothing, just to name a few. Others might add the orange juice substitute Tang and the Tempurpedic mattress. Now some of these are clearly inventions. Most are innovations that were spinoffs from underlying inventions such as basic chemistry in the case of kidney dialysis or the lithium batteries that are used in cordless power tools.
How one should measure the value of the underlying inventions or their innovative applications is not at all clear. However, it can become dangerous to efficient resource allocation if the government is put in the position of picking winners and losers by allocating funds to some research and not to others.
If the supply of inventions by industry is deficient, as Chairman Bernanke suggests, then there may be a role for government support of basic research. Yet, he provides no evidence or way to judge how much is enough. The one private sector entity that probably did more than any other to invest in inventions was Bell Labs. Still, that activity was rooted in a monopoly, supported by monopoly profits, and much of the work was designed mainly to perpetuate that monopoly. The breakup of the Bell system also led to a significant decline in Bell Labs. By the way, both the transistor and LED were products of Bell Labs to a great degree.
Should government decide to get into the R&D business on a larger scale, one can make the case that the focus should be on supporting basic inventions through grants to universities and the like not on supporting the innovative applications of inventions to products. The positive externalities should get distributed by the application of inventions to innovative business applications. It becomes a slippery slope if government is to pick winners and losers in the application of those inventions and their ability to enhance productivity.