Thoughts on economics and liberty

Terence Kealey’s 1996 challenge to government funding of science

I've read Kealey's 2008 book which I've discussed earlier. I'm reading it again.

I got a chance to listen to (a part of) his talk that is linked here, and noted the fact that till the 1940s, there was literally no funding of science by the US government. And yet, we all know that US was the HOTBED of innovation.

He mentions (in his talk) about three nations that spent HUGE amounts of government money on science: India, China and USSR – in the socialist era: and how that money was wasted. I was reminded also of the chapter on USSR in Timothy Ferris's Science of Liberty (which I've discussed earlier).

And he shows that massive projects (e.g. CERN) would readily get funded by private charities if only the government would stay out!

Government funding of science is a SURE WAY to destroy public money.

In 1996 he wrote The Economic Laws of Scientific Research in 1996. I don't have the book, but the following two book reviews give an overview of his earlier ideas. It is clear that Kealey had discovered key elements of his arguments even in 1996.

1) By William F. Shughart II, in Managerial and Decision Economics, Vol. 18, No. 5 (Aug., 1997), pp. 414-416

One of the meager benefits of being a book review editor is having first pick of the titles crossing one's desk. To my own great profit, I exercised this privilege with Terence Kealey's The Economic Laws of Scientific Research, a forceful, wide-ranging, and erudite critique of public policy toward science. Anyone who reads the book's 'Preface and Acknowledgments' will at once be engaged and kept absorbed until the last page by the author's fluid exposition, his incisive observations on the folly of government fund­ing of scientific research, and, not least, his wry humor­Kealey gets off some of the best one-liners in the con­temporary scholarly literature.
Economists such as Nobel laureate Robert Solow and, more recently, Paul Romer, who have studied the con­tributions of technological change to economic growth should be positively embarrassed that it has taken a clinical biochemist to demonstrate that the emperor-sponsor of R&D has no clothes. (Romer in particular ought to be nearly suicidal to see long passages of his turgid prose cheek to jowl with Kealey's faultless phraseology.) And supporters of government funding for the arts and huma­nities should be terrified at the prospect that a critic as eloquent as Professor Kealey might be waiting in the wings to examine their case.

The Economic Laws of Scientific Research manoeuvres the reader through the set-piece battle waged between two very different world-views of the determinants of economic progress and of the sources of the new products and new technologies that underpin it. Commanding one side is Francis Bacon, who fathered the idea that pure science comes before applied science. In other words, the new technologies and new products that are the engines of enhanced productivity and economic growth depend cru­cially on advances in basic scientific knowledge that are by their very nature unmarketable and, hence, will not be supported at socially optimal levels by commercially minded enterprises. Government subsidy of pure science is consequently essential to prime the pump of economic progress.
Commanding the other side is Adam Smith, who con­cluded from empirical observation that applied science begets applied science. In the main, technological progress springs not from the efforts of the selfless scientific truth-seekers of academe but rather from the discoveries of engineers, operatives, and others employees of commercial enterprises who encounter practical production problems and who, being close to the market, have access to the information and face the incentives necessary to solve them. Pure science is valuable only to the extent to which it contributes to the solving of these practical problems, but (and this is a key point) to the extent to which it does, commercial enterprises will fund it. Science, both pure and applied, will flourish under a policy of laissez-faire if Smith is correct and, moreover, such a policy will avert the heavy tax and bureaucratic tolls government exacts in return for its largesse.
With these two world-views in mind, The Economic Laws of Scientific Research proceeds systematically to demolish the Baconian model. It does so by marshaling a mass of historical evidence demonstrating that mankind's great inventors have often been uneducated, sometimes illiterate, and almost always ignorant of the basic science underlying their discoveries. Indeed, the historical record shows that advances in pure science have not uncommonly followed the trials blazed by applied science. Technology not only breeds technology in a learning-by-doing fashion, it also breeds science. Moreover, rather than emerging from theivory tower as Bacon would have predicted, innovation generally occurs in the R&D departments of industry: according to one study, 'ninety per cent of new technology arises from the industrial development of existing tech­nology, not from academic science' (p.216).
Kealey builds his case for the model of Smith in a series of chapters that concisely trace the history of science and technology during antiquity, the Dark Ages, and on through the commercial, agricultural, and industrial revolutions. The main lesson here is that 'science is not a delicate little flower, whose fragility demands the protection of the state' (p. 306). Under the laissez-faire regime that made Bir­mingham the workshop of the world, British science attracted funding from a variety of private sources, including the 'hobby scientists' (wealthy men such as Henry Cavendish, Charles Darwin, and William Parsons who, freed from the burden of heavy taxes and death duties, devoted their lives to science), industrialists who promoted science for commercial advantage by conducting R&D in-house and by establishing universities and research insti­tutes, philanthropists who endowed university professor­ships, and the universities themselves which, responding to industry's need for trained scientists, were fully funded by students' fees, private commissions, and gifts. While the strictures of the market dictated that priority was given initially to applied science, as the Industrial Revolutation played out industrialists perceived that they were exhaust­ing technological development and they began to explore basic science more profoundly. In sum, 'the Industrial Revolution was born in Britain because Britain was laissez-faire. In the early years, the free market correctly directed investment into technology, but as the revolution acceler­ated, it correctly directed more and more investment into pure science. Britain's industrial and scientific success, therefore, evolved out of its commercial success …' (p. 81).
Kealey next brings statistical evidence to bear in chapters that trace economic history since 1870 and describe the science policies of the twentieth century. Comparative data from the OECD and other sources establish that pro­ductivity is the engine of economic growth and that richer countries (as measured by GDP per capita) both do more science (as measured by scientific papers published and patents filed) and better science (as measured by the cita­tion rates of scientific papers). In the process of interpreting these empirical regularities, Kealey elaborates what is essentially the 'convergence hypothesis' of economic growth: provided they embrace market institutions, poor countries grow faster than rich ones. They are able to do so in part because copying (and frequently improving) the technology invented by their richer neighbors is cheaper than developing their own.
The predictable slow-down in growth experienced by the richer industrialized countries has, also predictably, trig­gered demands for more taxpayer funding of science. Wars as well as peacetime anxieties over the prospect that, pick one, France, Germany, the former Soviet Union, or Japan are catching up have also played important roles histori­cally in generating calls for massive government support of military and civil R&D. As told by Professor Kealey, the evolution of science policies in the UK and the USA is largely a story of fear-mongering and bald rent-seeking by coalitions of prominent scientists and empire-building bureaucrats. As a result of the efforts of these groups, which pushed their agendas by (falsely on Kealey's evidence) raising the specter of the decline of British and American science, the institutions of scientific research were natio­nalized and politicized (more so in the former nation), displacing laissez-faire with central planning and reliance on the state.
What has government subvention of science wrought? In reviewing the sorry record, Kealey adduces evidence showing that central planning works no better in the lab than it does in other realms of economic life. Government funding has produced neither more science nor better science because governments institutionally cannot pick `winners': 'Governments are dreadful judges of commer­cial opportunities' (p. 204). They are too distant from the market, too short-sighted, and too vulnerable to pressure-group demands to allocate research funds to their highest valued uses and, because government perforce must tax industry in order to subsidize it, public funding for civil R&D displaces private funding. Even worse, this dis­placement is more than proportionate: less is invested overall in civil R&D in those countries whose governments spend the most on it.
The skewed research priorities, the lost academic freedom, and the culture of mediocre grantsmanship that government funding of science has spawned are master­fully detailed in the book's concluding chapter. But what of the theory of 'market failure' that proponents advance to justify taxpayer subsidy of science? Isn't science, especially pure science, a 'public good' that will be undersupplied if support for it is left to commercially minded enterprises? Kealey cites two studies showing that private firms which invest in basic research tend to grow faster and to outperform these which do not. R&D pur­suits are commercially profitable not because firms expect to capture all of the returns to their effort, but rather because they can appropriate enough of them to make their investments worth-while. First-mover advantages (lead time over imitators) apparently provide powerful incentives for commercially minded firms to fund scien­tific research.' Kealey also suggests that private firms invest in basic science partly as a way of compensating industrial scientists who, though they derive the most personal satisfaction from doing their own original work, must, because many technological advances are in fact produced by more mundane activities, spend much of their time reading and assimilating research results pub­lished by others. (Firms will of course not pass up the opportunity to exploit the rare breakthroughs achieved in their own R&D departments.)
I only have two quibbles with The Economic Laws of Scientific Research: Gordon Tullock's last name is mis­spelled consistently and, like some impenitent member of the Club of Rome, Kealey misapplies the law of dimin­ishing returns to forecast an upper limit to economic growth. Fortunately for his readers, the predicted limit will not be reached until the end of the twenty-first century, and fortunately for his readers' progeny, at the limit living standards will be at levels 20 to 100 times higher than today.
While a great deal of what Professor Kealey has to say will not come as too much of a surprise to economists trained in Chicago, Los Angeles, or College Station, The Economic Laws of Scientific Research throws cold water in the faces of the arrogant dons of Cambridge (both of them), Palo Alto, and Berkeley, who think they know better than mere businessmen how to optimize invest­ments in research and development. As Kealey so well puts it, 'capitalism should be left to the experts—capi­talists' (p. 206).
The same dead hand of bureaucracy that has system­atically destroyed the publicly funded schools and uni­versities of the USA and the UK rests heavily on the scientific establishments of both countries—and the demands for more of the same are loud. Perhaps Professor Kealey is right in predicting that, because the limits to which democracies will allow government to absorb pri­vate wealth have been reached, civil R&D is on a path to eventual privatization. As The Economic Laws of Scien­tific Research also informs us, however, taxpayers have long been swindled by appeals for more spending on education and technology. But if they begin turning a deaf ear to this special pleading, we will have Terence Kealey to thank.
Department of Economics and Finance,
University of Mississippi,
University, MS 38677, USA

2) Rent-seeking in the Sciences. Reviewed by Eric Jones

Patriotism may be the last refuge of a scoundrel. But Terence Kealey, a Cambridge biochemist, would say that the last refuge is a chair in the public understanding of science. He wishes first to persuade us that scientists are socially insecure, desperately competitive, authoritarian rent-seekers. He is horrifyingly successful at making this stick, aided by a bold, even bull-headed, willingness to show everyone up, whenever possible by their own embarrassing words. One of his exam­ples is the rule-sheet of a Scottish biochemistry lab which includes 'Newspapers and non-scientific reading matter may not be read in the laboratory' and 'I will note any infringement of these rules on your references'.

Next, Kealey wants to establish that in the funding of science laissez faire works best, whereas state funding breeds 'government failure' — reducing the total spent, distorting enquiry, and leading researchers to be treated worse than they would be by any private employer. He does this in a clever but intensely opinionated fashion. He adds Gallons d'essai about everything from historical figures to technical standards, all wrapped in the jokiest style I can ever recall reading in an otherwise serious book. The polemics blur his message though they will not blot it out for the attentive reader.
Kealey is an inquisitive student of history. He sets up many arguments as assaults on his own Fetes noires, including Francis Bacon, Jean-Jacques Rousseau, Charles Babbage and Matthew Arnold. His tone may be indicated, not unfairly, by what he has to say about the last two. Babbage proposed a 'Difference Engine' which was, Kealey asserts, nothing more than 'a mechanised abacus'. He 'squeezed no less than 17,000 pounds out of the Government to build his Engine (when the average wage was 2 pounds a week)' (p. 80), and, after fruitlessly exhausting this grant, switched his goal to an 'Analytical Engine' that used punch cards. The government balked at this second project,which then prompted Babbage into doing the one original thing in his whole life. He inaugurated the tradition by which prominent scientists denounced the government for neglecting science. His Decline of Science in Britain was published, with true Babbage incompetence, in 1830, the year before Faraday made the most important of Britain's contributions to science, the discovery of electromagnetic induction … (p. 81)
Matthew Arnold's thesis was not at all original: the Germans are coming. 'He believed that Bismarck's Polytekniks and Hochschulen would thrust Germany into scientific, technological and industrial dominance.' Britain's free market could not generate comparable institutions because, 'the free market is quite incapable of planning anything on a national scale, oh no. This is, of course, rubbish' (p. 343). Cer­tainly, Kealey presents useful, even damning, evidence of the failures of state funding in Germany and Japan. By and large I accept his Smithian view. An open society, the free market and (less obviously) private investment do seem to deliver better scientific and technological results. What relying more on private funding might do for the cul­tural industries, and how salutary such a change might be, are different issues. As far as science goes, it remains a pity that rhetorical passages like those concerning Charles Babbage and Matthew Arnold — and there are plenty of them — may irritate some readers into discounting the central message.

The book's first 138 pages consist of several chapters of economic history, mostly British, from prehistoric times to the 20th century. These dwell on familiar topics like industrialisation and the comparative performance of Britain, Germany and Japan from the late 19th century. The chapters on the industrial revolution discuss standard examination topics of the genre 'did the steam engine owe more to science than sci­ence owed to the steam engine'. The larger aim is always to show that laissez faire wins; the particular aims are to invalidate various propositions about the indispensabil­ity of science to technology and growth. Answers: new technology comes from old technology, not from new science, as free markets rapidly discover. Industry will fund all the science you really need. If you want economic growth, leave the market alone to allocate resources.
Yet these chapters are largely beside the point. The extent to which history makes the case depends a little too much on the way it is set out. The economic history is a strange mixture of the intelligent, the informative, the amateurish and the deplorable. Like many scientists who turn their hand to history, Kealey tosses strict method out of the window. A tenet of the scientific method is that experiments have to be recorded in such a way that future experimenters may replicate them. Kealey, for all his reading in another field's literature, does not permit the reader to check his sources. He supplies end-notes without page references, which would oblige the reader to hunt for quotations through works as long as the whole of the 'Encyclopedia Britannica, 17th edition'. No one is going to do that. I do not suppose an author could get away with such sloppiness in biochemistry; it is unacceptable in economic history.
At the heart of the book lie three laws, which are propounded and defended by regular social scientific means. They are empirical relationships established by inter­national comparisons of non-military R&D funding and GDP. The first law of fund­ing for civil R&D states that the percentage of national GDP spent rises with national GDP per capita: that is, that rich countries do more scientific work than poor ones. Citation analysis further suggests that 'the richer the country, the better the science'. The second law states that public and private funding displace one another. The third law adds that the displacements are not equal: public funding displaces more than it supplies. This has the force of saying that if governments raise taxes on industry to support their own programs they will reduce private investment disproportionately.
Kealey's laws seem adequately founded in regression analyses, give or take the calibre and appropriateness of the available data. But it is easy to see why his conclu­sions are resisted when the scientific establishment is accustomed to securing its funds in political markets, by cosy agreements in committees, by rigging peer review, and similar devices. In a period when the proportions of state and private funding are changing, scientists living on government grants are bound to feel threatened. At the same time, more specific project funding and less by way of block grants is raising up a generation of workers on short-term contracts, chivvied like gipsies from lab to lab. Kealey suggests something by way of remedy without allowing this effect to detract from his broader conclusions.

Kealey's style and message have both proved infuriating to conventional, publicly-funded scientists. He is the enfant terrible of British science and an ogre to its funding agencies. In the 1980s the scientific establishment was bleating loudly that British sci­ence was in decline (shades of Babbage), so even more government money was needed. Contradicting this so trenchantly brought Kealey up against the unforgiving proponents of conventional wisdom, who also tended to be anti-Thatcherites. How­ever, he bravely persisted; for instance, he continued to demolish the 'declinist' publi­cations of workers in the Science Policy Research Unit of Sussex University, though at what cost to his career one cannot say. Ironically, government spending cuts may transform his views into acceptable rationalisations of the turn towards private funds.
This is a curate's egg of a book. It is astonishingly well-informed, full of tough reasoning and crammed with hilariously damaging quotations about the rent-seeking on which natural scientists spend so much of their time. The better parts are truly hard-hitting. They are supported by evidence drawn from reading so wide as to make one wonder whether the author ever sleeps. Happily, the weaker parts, largely those dealing with history, seldom turn out to undermine the main case that private funding of research is more effective than state funding. The relentless demonstrations of this must come as a revelation to those of us conditioned by government subsidies and bureaucratic control. Experience may have made many of us suspicious of these ap­proaches; this work will crystallise our suspicions.
The book as a whole is hard to appraise without close reading, an exercise which sadly feels rather like fighting through the bode. A more disciplined hand might have made the case easier to follow but, to be fair, would have been unlikely to expose and stop up so many rent-seekers' bolt-holes in such a devilishly entertaining way. A duller author might have deprived us of the eye-popping examples of conniving and farce that surround the government funding of science. My conclusion is that the ef­fort required to study this quirky text is well worth it overall.
Eric Jones is a Professorial Associate at the Melbourne Business School.
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Sanjeev Sabhlok

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