Conservative Views: Why state R&D flops

Why state R&D flops, by Peter Foster
Financial Post, Wednesday, January 07, 2009

Whatever one's views of a bi-national bailout of the Big Three, most pundits seem to agree that a significant part of any funding must be devoted to developing "fuel-efficient cars of the future." Apart from its multi-billion dollar share of the bailout, the Conservative government of Stephen Harper has launched a $250-million "Automotive Innovation Fund." Meanwhile a key part of president-elect Barack Obama's plans to "stimulate" the U. S. economy involve funnelling US$150-billion over 10 years to the development of "green" technologies.

Those inclined to give credence to such grandiose plans would be well advised to read a recent book titled -- somewhat misleadingly -- Sex, Science & Profits, by British academic Terence Kealey. The book deals with the nature of science, the history of technology and the role of governments in promoting economic growth. It provides a devastating critique of states' failure to fund economically useful knowledge, and suggests that all spending on "technologies of the future" is likely to wind up down the drain.

Professor Kealey is not promoting some off-the-wall, right-wing economic theory. A comprehensive 2003 study by the Organization for Economic Co-operation and Development titled "The Sources of Economic Growth in OECD Countries," found that the only useful R&D came from private sources and that public R&D funding tended to have negative consequences.

Professor Kealey provides the history and psychology behind this inconvenient truth, and sets out to explode the pervasive notion -- first propounded by the prototypical 17th-century English policy wonk, Sir Francis Bacon -- that science is a "public good" that needs to be promoted by governments.

In a sweeping analysis, Professor Kealey notes that advances in both science and technology have -- from the steam engine to radio astronomy -- come overwhelmingly from the private sector. "Powerful" states, from Egypt through China to modern Russia, have held up technological advance rather than promoted it. The vast U. S. expenditure on research in the wake of the Sputnik scare in the 1950s managed to put a man on the moon, but has (strategic considerations to one side) done little or nothing for the well-being of the average American.

Professor Kealey supports the wisdom of Adam Smith, the 18th-century Scottish economist, who suggested that technological advance was a natural consequence of market specialization which could not be improved by governments.

The Industrial Revolution in Britain was promoted by the political freedom's emerging from the "Glorious Revolution" of 1688. Its agents were eminently practical private tinkerers who had little or nothing to do with government or the educational institutions of the day. France, by contrast, was dripping with state-funded organizations to promote agriculture and science, but lagged Britain severely.

Professor Kealey explodes the notion of private "underinvestment" in R&D, which is based on flawed economic theory rather than industrial fact. He also highlights the counterproductive-ness of government technological promotion, using two prominent British examples. Before he became Prime Minister, Harold Wilson, in the early 1960s, promoted the "White Heat" of technological revolution, using the Soviet Union as a model. His Labour government greatly increased public R&D spending, which yielded the first commercial nuclear reactor, the first jet passenger aircraft, the first commercial computer and (half of) the first supersonic commercial aircraft. But what all these "achievements" had in common was that they were financial disasters, and accompanied a precipitous decline in the British economy.

Margaret Thatcher, by contrast, was castigated for cutting government R&D, but her cuts were more than compensated for by private spending, suggesting that government R&D merely "crowds out" the private version. Government R&D also tends to be counterproductive because it emphasizes political priorities and corrals companies into failing consortia.

One of Professor Kealey's most fascinating revelations is the astonishing success of promoters of publicly-funded science and technology in bending history to suit their prejudices. The advance of privately-funded British science has for two hundred years gone hand in hand with constant predictions of decline. The experience of post-war Japan was comprehensively falsified. In fact, Japanese government support for R&D has almost everywhere proved counterproductive. State agencies opposed the development of cars, electronics and cameras, while government promotion of "fifth generation" computers, and the space and nuclear industries have been a bust. To the extent that Japan was successful, it was due to private R&D.

Again, Germany's post-war success was not due to government but to the state's abandonment of so-called "Rhenish capitalism," with its cartels, tariffs and subsidies, and the adoption of the "Ordoliberalism" of Ludwig Erhard, who established an independent central bank, reduced government controls and liberalized trade.

Professor Kealey notes that government funding tends to corrupt science, but unfortunately does not go into the currently most dangerous example: that of state-funded "climate science" -- although he does refer to the establishment pogrom against the environmental skepticism of Bjorn Lomborg.

Bold presidential technological commitments such as those of Mr. Obama have-- with the exception of the moonshot, which could not have been less commercial -- a depressing history. If Mr. Obama is channelling any former president right now, it is the hapless Jimmy Carter, who, in the 1970s, invoked the "moral equivalent of war" to promote energy alternatives. Professor Kealey's book explains why he--inevitably --failed.