Monday, November 05, 2012

A thought about R&D as a means to produce capital.

Roger Pielke in his blog posts "Does R&D Drive Economic Growth? The Mythology of Innovation". makes some good points.
  • One of the arguments in favor of technology fueling economic growth is that economic growth generally outperforms that predicted by growth of labor and capital alone. Total factor productivity growth is seen to increase the contribution of both labor and capital to total growth of the GDP. We have seen decades of reengineering firms and restructuring markets and economic sectors, all of which is intended to increase productivity (but by means other than technological innovation). Thus not all improvement of total factor productivity is attributable to improved technology.
  • Benefits from R&D accrue to the firms that conduct the R&D, to other firms, and to consumers and the public at large. Since money spent on R&D produces knowledge that yields future economic (and other) benefits, the stock of useful knowledge can be seen as capital. Some of that capital is owned within the firm, some accrues to many firms in a sector, and some accrues to consumers (in the sense that it yields future streams of consumer benefits).
  • That stock depreciates. For example, a firm may lose the competitive advantage of a new product or process developed through its R&D as other firms develop their own technology to compete. On the other hand, the accumulated knowledge created by the R&D of many firms may continue to benefit consumers for a long time. Thus the depreciation rate may be different for private firms versus for the public.
  • Not all R&D pays off equally. This is obvious at a micro level. Most drugs that are brought to testing are never commercialized. It seems also to be the case in terms of fields of research. I suppose this too is obvious. We fund research to discover if there are intelligent beings on other planets because we want to know, not because we think that that knowledge will increase GDP.
  • Not all technological innovation is driven by new invention, and not all invention is driven by R&D. A lot of technological innovation is driven by technology transfer, a lot of technology deepening is done on "the shop floor", and a lot of invention is done by tinkering.
The rate of economic return to R&D depends on other factors. I assume that it has gone down during the great recession as firms have been reluctant to make investments needed to produce new products of products and many consumers have been unable or unwilling to buy them.

And of course, the ability to choose appropriate areas for R&D, the ability to do it well, and the ability to translate new technological knowledge into useful products and processes are not universal, and indeed need to be developed by investment over time.

Our economics is not well positioned to study science and technology. The understanding of electricity and the development of a suite of technology based on electricity from motors and generators to the Internet pay off for almost all of us every day even though the research dates back a couple of hundred years. We don't have an economics that really accounts for development of new knowledge that continues to function for centuries. Often there are increasing returns to investment in an area of technology -- the more R&D, the higher the return to each new investment in R&D. How much of the benefit of the Internet should be ascribed to the discoveries of Michael Faraday in the 19th century.

Pielke is addressing the value of research and development funded by the National Science Foundation. It was specifically designed to fund R&D that would not be funded by the private sector. Some of that R&D would be of too high risk, or two long term, or two difficult to appropriate the benefits for commercial firms. One of the more innovative programs of the NSF has catalyzed cooperative funding of precompetitive research that would benefit the entire industry of the donor corporations. Some of the NSF research funding is simply paying the U.S. portion of the cost of describing the world, the solar system, and the universe in which we live -- because people want that knowledge. It is very hard to estimate the benefits from the NSF portfolio, but that does not mean that the benefits do not outweigh the costs.

In some sense it is obvious that the development of technology underlies all of human progress. It we were to try to support seven billion people on earth with hunting and gathering technology -- no matter how well organized our agriculture, manufacturing and service industries -- almost all of us would quickly die.

Still, I share Pielke's conclusions:
The integration of post-war science policy with a misinterpretation of neo-classical economic theory led to the creation of a mythology of innovation that persists today........ 
So in our public debates, rather than examining innovation policies and the complexities of securing economic growth, our discussions typically devolve into simplistic appeals for more federal R&D, such as found in the Washington Post op-ed that I opened with above. 
The enduring popularity of investments in federal R&D among politicians of both parties and US intellectuals has helped to reinforce the narrowness of this conversation. Innovation, and thus economic growth, are related to complex issues well beyond R&D like immigration, inequality, education, property rights, health care and beyond. A narrow discussion also helps to cover up the fact that neither Republicans nor Democrats (including both 2012 presidential candidates) has articulated a coherent theory of economic growth. This should not come as a surprise because for decades academics have paid little attention to the subject either -- it is time that changed.

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