A Libertarian Perspective on Economic and Social Policy

Lecture 12Government Funding of

Knowledge, Ideas, and Culture©2007 Jeffrey A. Miron

Introduction

• The U.S. provides substantial funding for the production of science, knowledge, ideas, arts, humanities, culture, recreation, and the like:– National Science Foundation– National Institutes of Health– National Endowment for the Arts– National Endowment for the Humanities– Corporation for Public Broadcasting– Museums, monuments, symphonies, operas, …– Sports stadiums, skating rinks, athletic fields, …– National and state parks, seashores, …

Introduction, continued

• For the most part, this funding is not currently controversial:– Everyone one agrees that ideas, knowledge, science,

arts, museums, parks, and the like are “good.”• In addition, there is a coherent economic

rationale for government intervention in at least some of these areas: – Knowledge is a public good; the producer cannot

exclude others from using it and therefore cannot capture the full returns from this activity. This suggests the private sector does not have adequate incentive to produce knowledge.

Introduction, continued

• This justification for subsidizing the production of knowledge is at least partially correct.

• But this lecture argues that the case for subsidizing knowledge is weaker than commonly asserted and in practice does more harm than good.– Relatedly, the lecture suggests we should think about

all the interventions list above together because certain key issues arise with respect to each of them.

– Thus, there is a tendency to do them all, rather than just the relatively important ones, which is part of why it might be better to do none at all.

Outline

• Arguments for Intervention, Science

• Arguments Against Intervention, Science

• Government Funding for Arts and Humanities

• Government Funding for CPB

• Government Funding for Baseball

• Patents

Government Subsidies for Scientific Research

• One key area of government intervention in the market for knowledge and ideas is funding for scientific research:– National Science Foundation (1950, $5.8 billion). – National Institute of Health (1900/1945, $28.8 billion)– State colleges and universities.– Total Federal government is $69.6 billion

• For comparison, industry R&D is $181 billion.• Focus first on this kind of intervention.

The Argument for Government Funding of Science

• Basic science (pure science) is a public good: – Once the knowledge exists, it is difficult or impossible

to prevent anyone who wants to from using it.• Basic science, in and of itself, produces little

financial reward.• Basic science is a necessary first step for

applied science. • Under these assumptions, the private production

of pure science is plausibly less than what is socially optimal, and subsidizing pure science can increase social welfare.

The Argument for Government Funding of Science, continued

• The basic premise of the standard argument is difficult to dispute:– Ideas and knowledge, in science or

elsewhere, are indeed non-rival and non-excludable (subject to some caveats below).

– These are the classic conditions for a good to be a “public good” in the economic sense.

• But this characterization does not by itself make the argument for government funding convincing.

Does the Private Sector Underfund Science?, I

• The standard argument assumes that individuals and/or organizations fund science for the purpose of generating a financial reward.– Thus, if it is difficult to capture the full reward,

these groups have insufficient incentive to fund science.

– Stated differently, the standard view assumes there is substantial elasticity in the supply of basic research with respect to the return.

Does the Private Sector Underfund Science?, II

• There is abundant evidence, however, that many individuals and organizations derive substantial benefit from producing or funding basic science even with little or no financial reward:– Individual investigators (Galileo, Newton, DesCartes,

Darwin, Pasteur, Adam Smith, Milton Friedman)– Universities and Colleges– Philanthropists– Private companies

• Thus, the magnitude of the underfunding is unclear.

Aside: Why Do Private, For-Profit Companies Fund Pure Science?

• Allowing top scientists to indulge their interest in pure science is one way to get them out of academia and into companies.

• Even when the insights of pure science are likely to leak out over time, thereby reducing the return from funding basic research, there may still be enough of a first-mover advantage to justify it financially.

• Thus, private companies certainly have some incentive to fund basic research (and they do), even if not a full incentive.

Does the Private Sector Underfund Science?, III

• The standard argument also rests on the claim that applied research flows from basic research.

• This is undoubtedly true in some instances, but in an enormous number of cases, applied research flows from other applied research.– For example, all the research on semiconductors.

• And, in some cases, applied research has generated the pure research by producing empirical regularities that pure science explains.

Summary So Far

• These caveats do not mean the private sector necessarily provides the optimal amount of science funding:– They do suggest that the magnitude of the

“underfunding” is not necessarily large.

• Two questions therefore arise:– Does government funding have negative side effects?– Does the evidence actually show a relation between

government funding and some outcome such as GDP or productivity growth?

The Costs of Government Funding of Science, I

• If government funds science, it must choose which science to fund, and the decisions often reflect politics rather than science:– Stem cell research– HIV versus other diseases– Environmental policy– Drug prohibition

The Costs of Government Funding of Science, II

• Government funding of science tends to centralize the decision process about which science to fund:

• This seems to perpetuate a bias toward big science, perhaps because these projects generate pork that politicians can dole out (for example, the SSC)

• The centralization also generates a bias toward the status quo.

The Costs of Government Funding of Science, III

• Some basic research is interesting but probably irrelevant, so the funding for this research is a transfer from the taxpayer generally to “smart people.”– The SSC is one possible example.– Much of economics is another example.

• And there are reasonable ways scientists can capture the returns from interesting, but “non-productive,” pure science.– Being a professor is the obvious example.

The Costs of Government Funding of Science, IV

• The science that government funds is, in many cases not basic science:– Instead it is applied science with significant

potential to generate marketable products and profits.

– Biotech is probably the best example:

• Thus, much government-funded research is a hand-out to private companies that avoid some costs of funding their own (applied) research programs.

The Costs of Government Funding of Science, V

• Perhaps the single biggest cost is that this policy opens the door for a much broader set of interventions:– Government funding for humanities, arts, culture;– Government subsidies for stadiums, parks, skating rinks, …

• The basic argument for all these programs is similar to that employed for funding science:– There is a social benefit that no one can capture individually, so

government must subsidize the activity to balance social benefits with social costs.

• But this argument is even less compelling in these other areas than it is for funding of science.

Does Government Funding of Science Improve Productivity?

Does Government Funding of Science Improve Productivity?

• The graph in the previous slides says no.

• Admittedly, that graph is a crude approach to measuring the effect.

• But it raises in a stark way the fact that a huge fraction of both science and economic progress occurred without the NSF, NIH, or other government funding.

Government Funding of Science: Summary

• The key issues are empirical ones:– It is difficult to take a definitive stand based

solely on a priori arguments.

• Careful examination of the case for government funding, however, shows it is a lot weaker than usually asserted.

• Before taking a final stand, it is useful to examine similar government interventions in other areas.

The NEA and the NEH

• The NEA funds the arts and the NEH funds the humanities.– Both founded in 1965– Budgets are roughly $125 million each.

• The standard justification is that the arts and humanities “benefit everyone” but that no one person can capture the return:– For example, painting a beautiful picture or writing a great novel

benefits society for generations• As in the case of science, this argument plausibly has a

grain of truth.• Overall, however, the argument is far less compelling

when applied to the arts and humanities.

Funding Science versus Funding Arts and Humanities

• There are many mechanisms for capturing the returns from arts and humanities:– Selling artwork or books, performing symphonies, giving rock

concerts, charging admission to museums, and the like..

• The scope for politicization of the work in arts and humanities is even greater than for the sciences.

• The nature/magnitude of any external benefit is much harder to pin down and more open to abuse:– This is not to deny the benefits of arts and humanities;– It is simply a statement that the external benefits are not

obvious.

• The amounts provided by government are trivial compared to the “funding” from private sources.

The Corporation for Public Broadcasting

• Created by Congress in 1967

• Funds NPR, local public TV and radio stations such as WGBH or WBUR.

• Recent funding levels about $380 million.

• About 15 percent of public broadcasting revenues.

Funding for CPB

• The argument for government funding is again that there is some good with positive social externalities that the market will not produce on its own:– As above, what are these externalities?

• There is little question that the demand for certain kinds of programming is limited, so there might not be sufficient demand without subsidies:– That is not an externality.

Funding for CPB

• In any event, it appears that much of the programming is commercially viable and exists separately: – For example, A&E, Biography, History Channel, and

the like.• In other cases, the programming on PBS might

not exist:– That’s life. Nothing can, or should, guarantee that

every demand is satisfied independent of costs.• More importantly, the “externality” excuse opens

the door for government thought control about what is “good” information.

Funding Science versus Funding Baseball

• Consider the arguments for government funding of arts, humanities, culture:– The same arguments apply to funding baseball (e.g., in the form

of stadiums)• Baseball is part of American “culture” and “history.”• Baseball would be far smaller without the subsidy.• Thus, government should subsidize baseball to insure

the survival of this “vital” part of America.– Baloney. Just an excuse to tax some to benefit others.

• Where would this line of thinking end? – Football? Square Dancing? Mud-Wrestling?

• There is no logical stopping point once policy starts down this path.

Patents

• One way that government attempt to promote science if by issuing patents and enforcing patent protection.

• The argument in favor is standard:– Many inventions are easily copied, reverse

engineered, etc., so without patents there will be insufficient incentive for the private sector to innovate.

• This argument makes sense as far as it goes, but there is more to the issue.

Patents, continued

• By granting a patent, government gives the patent holder a monopoly.

• Thus, there is “too little” production during the life of the patent.

• And, in some areas, patent protection is probably not critical.

• Thus, in these areas patent protection creates monopoly without a benefit in spurring innovation.– Aside: Whether this is inefficient depends on scope

for price discrimination.• The net effect is hard to know.

Conclusions

• There is a plausible argument for government funding of science, but there are also both a priori reasons and empirical realities that make the case far from compelling.

• Even if one accepts the arguments for science, they are far less convincing for other “ideas” or “intangible” benefits.

• Thus, putting government into the business of choosing “ideas” or “knowledge” opens the door to a huge amount of intervention that is inefficient at best, a path to thought control at worst.

• And the evidence suggests the private sector does a more than adequate job of producing technology, arts, culture, baseball, and all the rest.