Thoughts on economics and liberty

Sex, Science and Profits by Terence Kealey

The death knell of government funding of tertiary eduation, science, and research.

I accidentally came across this book (London: William Heinemann, 2008) while browsing a bookshop last week and bought it because it was very well written and dealt with economic policy. By the time I finished it (just a few hours after starting it, so engagingly written is this book!) I found that I now have another personal companion for life: a book to live with; to carefully re-read when one has some time on one’s hands. It is on par with my top favourties: Julian Simon’s The Ulitmate Resource; Milton Friedman’s Capitalism and Freedom; Ayn Rand’s Capitalism: The Unknown Ideal.

What I like is that F. A. Hayek is very strongly vindidated through this book (even though Kealey doesn’t cite Hayek even once). The book offers the strongest possible support for sponteneous order and self-interested drivers for the advancement of science and technology. It tells us that freedom should be our first priority in life, along with the accompanying systems of justice and law and order. Everything else we can take care of ourselves. We want our governments to stay away from us as much as possible for they harm us badly each time they try to help us.

The book sends higher education and science bureaucrats packing! They won’t like it one bit. Indeed, the collectivists, mercantilists, and statists in our midst (most ‘intellectuals’ fall in one or other of these categories) will resist the message of this book and keep harping on the need for government funding of higher education and R&D for apparently that is the only way to foster innovation. But Kealey shows that innovation has overwhelmingly come through privately funded initiatives. Indeed, wherever the government supports higher education and research, expect it to damage all prospects of innovation.

Sadly (and as expected), many modern economists with fancy toolkits but with little understanding of business, science, or society have fared rather poorly. But the book vindicates some of my favourite economists: Adam Smith, Joseph Schumpeter, Armen Alchian, von Neumann, and Robert Axelrod, among others. The book has also reminded me that I should try to read up more on Thornstein Veblen when I get some time: a person much neglected today. Also William Baumol and a few other modern economists. Unfortunately, one simply doesn’t have the time to read everyone.

What was really surprising, though (and this is simply an aside; nothing to do with the book’s main theme), was my discovery that Keynes once thought that The Origin of the Species is ‘economics couched in scientific language’ (p.361). That is quite startling, for it implies that Keynes possibly had a broader, evolutionary view of society and understood the nature of competition and spontaneous order – but that view doesn’t seem to come through in his rather statist General Theory that demands collectivist intereference in our freedoms by the state.

Either way, the classical liberals have been strongly vindicated. Most mind blowing (as far as I am concerned) in the book was the vindication of Thomas Jefferson’s famous belief that ideas should be free. As he had said, “He who receives an idea from me without lessening me, as he who lights his candle at mine receives light without darkening me.” Kealey confirms that Jefferson was right and that governments should not issue patents (except in the pharmaceuticals industry) for issuing patents almost invariably harms innovation and significantly reduces wealth – including the wealth of patent holders themselves! Even patent holders are far better off by using their findings commercially and letting competitors try to improve things: that triggers further innovation rapidly and yields the highest profits for everyone.

This book strongly reinforces the purely market-based model for university education (supported by loans from government for students) that I have advocated in Breaking Free of Nehru. In particular, for the Freedom Team of India, my message would be: we shouldn’t advocate government funding for universities in India. Let the market work out what it needs, including the science it needs. Much material from this brilliant book will now find its way into my second book, The Discovery of Freedom in the coming weeks. It supports everything I have been saying. No wonder I like it so much!

A brilliant piece of work! STRONGLY recommended!


Excellent article by Peter Roberts in AFR 21 October 2010, p.68, “Funding’s role in science”

From catalaxy files

Terence Kealey on the economics of scientific research

A summary of the book appeared in a series of posts on the Cat a few years ago and this is theconsolidated summaries.
A few extracts to give the flavour.
Chapter 5. The Agricultural Revolution.
The area of innovation shifted to Holland and England. Vital innovations such as crop rotation and systematic improvement of crops and pastures were driven by gentleman farmers such as “Turnip” Townsend and associations such as the Lunar Society which consisted of a mix of scientists, engineers and industrialists.  By 1850 agricultural productivity in Britain was increasing by 0.5% per annum, unprecedented in history. Laissez faire ruled (almost) and there was no state involvement in research or industry policy.
Chapter 6. The Industrial Revolution.
Between 1780 and 1860 the population of Britain tripled from 7.5M to 23M and the real per capita income double in real terms across all classes.
The drivers were increased productivity of machines and the movement of labour from the land (and Ireland) to the factories.  The driver of machine technology was NOT science as predicted by the Bacon but the improvement of existing technology by ingenious artisans such as Newcomen, Watt, Trevithic and Stephenson. Amazingly, the scientists were struggling to keep up with the tradesmen! Hooke (the scientist) told Newcomen that his idea would not work while he was developing it (fortunately he persisted) and Carnot’s work on thermodynamics was prompted by Watt’s steam engine which could not work according to the laws of science as they were understood by leading scientists at the time.
France followed the Bacon model and set up glittering science laboratories and institutions of learning, while the state ran on the basis of taxes extorted by an army of Farmers-General (tax farmers) working on a commission basis with draconian powers of search, detention and confiscation. Hence the Revolution, while the science laboratories produced scientific advances without any impact on technology or the wealth of the French people.
Chapter 7. Economic History since 1870
This chapter is about the comparative economic performance of nations with some warnings about the valid and invalid comparisons that are often made. Invalid comparisons are often used to promote the Baconian approach to science with the aim of getting more state involvement by way of industry policy and public spending on science and education. A classic example is the comparison of Germany and Britain post 1870. Bismark’s warfare/welfare state sudsidised and protected local industries, especially steel. With the inflated cost of German steel it made sense for England to produce less and buy from Germany, still a lot of people just saw the decline of an industry, not wealth transfer from Germans to Britons. They also misread the play on technical education, being over-impressed by the network of state-funded technical colleges in Germany and forgetting about the 700+ industry-funded mechanics institutes that were established  in Britain between 1820 and 1850.
There is a stunning table on the economic performance of the current (1980) 16 richest nations from 1870 to 1980. These figures indicate  GDP per capita in 1870 adjusted to the $US in 1970.
Australia at 1393 leads the UK 972, Belgium 925, Holland 831, Switzerland 786, US 764.
On an index of  productivity Australia scored 1.3 compared with UK 0.8, Holland US and Belgium 0.7. Australia was at the bottom in growth of productivity since that time.
Chapter 8.  Science Policies of the Twentieth Century
In this chapter Kealey traced the evolution of science policy in the US and Britain. They both started with a substantially laissez faire economy and also minimal state involvement in science, then during the 20th century the Baconians and the Czars of science took over and they went for central funding and control in a big way. For those who have been receptive to Kealey’s argument thus far, the results are  predictable (cw 18th century France).
Chapter 10.  The Real Economics of Research
In this chapter Kealey looks at the economics of R&D and then the economics of academic science, in each case asking whether government funding is required to optimise spending.
He confirms three Laws of  Funding for Civil R&D.
First Law. The % of national GDP  spent increases with national DGP per capita.
Second Law. Public and private funding displace each other (compete). So public funds tend to displace private funds.
Third Law. The public/private displacement is not equal. Public funds displace a larger volume of private funds than the public input. (net loss).
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Sanjeev Sabhlok

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