Is Science a Public Good?

By Alex Tabarrok.

"Science seems like a public good; in theory, ideas are non-rivalrous and non-excludable. But the closer we look at how ideas actually spread and are used in the world, the less they seem like public goods. As I am fond of pointing out, Thomas Keller wrote a literal recipe book for the dishes he served at his world famous French Laundry restaurant and yet, the French Laundry did not go out of business. Ideas are in heads and if you don’t move the heads, often the ideas don’t move either.

In a new NBER working paper, The Effect of Public Science on Corporate R&D by Arora, Belenzon, Cioaca, Sheer & Zhang, (Tyler mentioned it briefly earlier) the authors make a similar point:

…the history of technical progress teaches us that abstract ideas are also difficult to use. Ideas have to be tailored for specific uses, and frequently, have to be embodied in people and artifacts before they can be absorbed by firms. However, such embodiment also makes ideas less potent sources of increasing returns, turning non-rival ideas into rival inputs, whose use by rivals is easier to restrict. Our findings confirm that firms, especially those not on the technological frontier, appear to lack the absorptive capacity to use externally supplied ideas unless they are embodied in human capital or inventions. The limit on growth is not the creation of useful ideas but rather the rate at which those ideas can be embodied in human capital and inventions, and then allocated to firms to convert them into innovations.

The question of whether science is a public good is not merely technical but has significant implications. If science is a public good, markets will likely underproduce it, making government subsidies to universities crucial for stimulating R&D and economic growth. Conversely, if ideas are embodied and thus closely tied to their application, government funding for university research might not only fail to enhance economic growth but could also hinder it. This occurs as subsidies draw scientists away from firms, where their knowledge directly contributes to product development, towards universities, where their insights risk becoming lost in the ivory tower. (Teaching scientists who then go on to careers in the private sector is much more likely to be complementary to productivity growth than funding research which pulls scientists away from the private sector.)

In a commentary on Arora et al., the Economist notes that growth in universities and government science has coincided with a slowdown in productivity.

Universities have boomed in recent decades. Higher-education institutions across the world now employ on the order of 15m researchers, up from 4m in 1980. These workers produce five times the number of papers each year. Governments have ramped up spending on the sector. The justification for this rapid expansion has, in part, followed sound economic principles. Universities are supposed to produce intellectual and scientific breakthroughs that can be employed by businesses, the government and regular folk. Such ideas are placed in the public domain, available to all. In theory, therefore, universities should be an excellent source of productivity growth.

In practice, however, the great expansion of higher education has coincided with a productivity slowdown.

Arora et al. present detailed empirical evidence causally linking the productivity slowdown to the expansion of government science. Government science has yielded smaller-than-expected productivity improvements due to significant trade-offs. Subsidies have moved heads out of firms and into universities and for many firms this shift of talent has not only reduced the firms’ capacity to generate ideas (crowding out) but has also impaired their ability to adopt academic innovations. As the authors write:

…productivity growth may have slowed down because the potential users—private corporations—lack the absorptive capacity to understand and use those ideas.

The great Terence Kealey made many of these points much earlier in his important book, The Economic Laws of Scientific Research (here is an online precis). Kealey, however, was challenging a beautiful theory, supported by the great and good of the economics profession, by pointing to an ugly practice. Arora et al. show that the beauty of the theory may have misguided us and that “the vast fiscal resources devoted to public science…probably make businesses across the rich world less innovative” (quoting the Economist)."