© 2008  Karen Selick

An edited version of this article first appeared in the October 28, 2008 issue of the National Post.
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Science Doesn't Need Government Help

One of the less-ballyhooed promises made by Prime Minister Stephen Harper during the election campaign was that a Conservative government would “invest in scientific research and development”, both to create jobs and to raise Canada’s profile as a technological leader in the world.

On the same theme, Finance minister Jim Flaherty recently reassured a meeting of the Association of Universities and Colleges of Canada that he was “on the same page” with their recent report touting the importance of government funding for scientific research to be performed at universities.

Like many people, Harper and Flaherty apparently hold the view that scientific and technological research projects must be publicly funded or else they wouldn’t occur—or at least, not in amounts that would be optimal for the country.

Enter Terence Kealey—bio-chemist, vice-chancellor of the University of Buckingham in Britain, and author of the 2008 book Sex, Science and Profits.  According to Kealey, the notion that science needs government subsidies in order to advance is not merely benignly mistaken, but downright harmful.

International comparisons show a clear positive correlation between a country’s R&D expenditures and its economic growth rate.  However, when you refine the figures further, a more nuanced picture emerges.  Business-produced R&D is what actually drives economic growth.  Publicly financed R&D, on the other hand, correlates negatively with growth, as government funded projects “crowd out” privately funded endeavours.

Kealey’s book provides empirical evidence, both ancient and modern, to support his thesis.  In the 17th and 18th centuries, for instance, English governments refused to fund science and technology.  French governments, by contrast, funded myriad research laboratories, science journals and educational institutions. But it was in England that the Industrial Revolution flourished, pouring forth inventions that increased immeasurably the well-being of English citizens, and leaving France in its dust. The free market proved far more efficacious than central planning at determining what science and technology its people needed.

This is not surprising.  It is absurd for the government to extract money from taxpayers (including corporations whom it expects to conduct R&D), then dole it out again to those same corporations in order to promote R&D—while deducting, of course, the bureaucratic costs of shuffling the money.  This is like giving a blood transfusion from a patient’s left arm into his right arm and spilling half the blood along the way.

Nor can governments expect to trump the marketplace at picking winners.  Governments lack the incentive—namely, the profit motive—that compels industry to be exquisitely sensitive to market signals.  Instead, politicians are influenced by factors that are at best irrelevant and at worst counterproductive to good science—for instance, job creation.

Kealey debunks the myth that MITI, Japan’s famous Ministry of International Trade and Industry, created that country’s meteoric post-war rise to prosperity, noting that “MITI had opposed the development of the very areas where Japan has been most successful: cars, electronics and cameras.”

As for universities, Kealey points out that after Margaret Thatcher cut British universities’ research subsidies in the early 1980s, industry and medical charities doubled their financing for university-produced science, and soon more than made up the shortfall.

In addition to historical arguments like these, Kealey’s book is filled with unorthodox and intriguing insights into eternal economic conundrums, sometimes resulting from his vantage point as a scientist himself.

One such insight is a response to the “free rider” argument. Economists frequently argue that companies won’t spend money on research if they cannot reap the entire benefit themselves.  But empirical evidence shows that companies don’t mind others benefiting from their R&D expenditures—sometimes even more than they benefit themselves—so long as they still profit more from their outlay than they would from any alternate use of that money (for instance, depositing it in the bank).

For example, a seed company whose research improved crop yields for its customers captured only 6 percent of that benefit in terms of increased profits, while farmers and sales intermediaries captured 94 percent of the benefit of the higher yields. But that extra profit proved to be a 17 percent return on the company’s R&D expenditure—a higher rate than it could have earned from any other use of the money. So it was worthwhile for the company to pursue that research even though others got a huge free ride.

Let’s hope that before proceeding with any grand spending sprees on science and technology, Mr. Harper and his policy advisors sit down and read Sex, Science and Profits

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       November 16, 2008