Nicholas, you’re talking about the people who brought us the pink batts fiasco, the BER and NBN.

What reason is there to think that these clowns would know, better than everyone else put together, how to “build” an innovative economy in the first place?

Yes new business must struggle to enter a world dominated by pre-existing businesses grown fat on the udder of big government. But that is not an argument in favour of more privatizing of profits and socializing of losses – it’s an argument against.

Obviously if certain kinds of investment returned 50%, private capital would supply it and should bear the risk. The reason they don’t fund it in any given case, is because they figure it will probably be loss-making.

So you assert that the taxpayer should fund activities that private capitalists assess to be probably loss-making, because “others can see and copy others’ new knowledge”. This has got F-I-S-H-Y written all over it. That way, if it’s loss-making, the taxpayer will be forced to pay. If the project makes a profit, the private capitalist will take it, and if it makes a loss, it will accounted for thus: government will be *assumed* to know that this loss-making activity actually makes net benefits for society as a whole.

But how would you prove that assumption is true?

In particular, how would governmen avoid the problem of knowledge that confronts the private capitalist in picking the winners from the losers beforehand? How would government be any better at predicting the future state of the market when they face all the same problems of uncertainty as the private capitalist, without his incentive to make profit, without his incentive to avoid loss, and without his ability to calculate in terms of profit and loss?

How are Julia Gillard, Wayne Swan and Bob Brown going to “respect the importance of avoiding waste and poor design in assistance programs”? You’re kidding, right?

The honest thing for an economist to do in these circumstances is speak truth to power, not aid and abet their false pretences. The emperor has no clothes.

Nicholas,thats for your wonderful insight into how to improve R&D to gain long term benefits from innovation.

Peter,

Usually my opinions lean towards your own re government spending, but in the field of health R&D for example, or in even basic science, I believe there is role for government spending. Research is terribly inefficient, and private funds are usually elusive unless 95% of the work is already complete.

I don't believe that something such as DNA would have been discovered if left to private entrepreneurs, as there was no commercially viable use for this discovery for many many years. As far as picking the winners and losers, this will always be a problem regardless of the format.

Disclaimer: health researcher who would be happy with 50% returns this week.

WOOOPS... "Quick" response, you were a tad fast there.. and maybe a little thoughtless ?

But consider this.

INNOVATION... ok..

1/ we have a promising idea.. a new 'widget' based on some great technical innovation.

2/ We know that China with it's veritable flood surge of new engineers and industrial espionage operatives is ready to snaffle up any new idea and capitalize on it.

3/ But..WEEEE are already ahead of them.. in fact.. we've lined up the production facility in China for ourSELVES...

and that... my dear Quick is the problem. (for Nicholaus too)

TWO STARK CHOICES for Australia.

1/ Improve our competitiveness on our home ground by 'wage justice equalization' tarrifs, and make the widget here.

2/ Forget 'making' stuff and just go straight to China.

For 1.. we simply could not compete world wide with our labor costs, so.. making the widget here would not bring in export bucks.

For 2.. it's the same.. but we would get some outside income from world wide sales... probably a better option.

CONCLUSION... "we are screwed"... they just haven't booked the funeral parlour yet.

Wage costs are only a small portion of production costs, and high wage costs is the old excuse for lack of innovation in the country.

There are countries with higher wage costs than Australia that carry out much more innovation, and create technology, and not just import technology like Australia.

There are now two opposing forces.

While governments offer some money to stimulate innovation, they also keep telling the public that tariffs would make manufactured items more expensive and of less quality.

This then makes the public believe that Australian made items are more expensive and of less quality.

The education system would also be one of the most stagnant and least innovative systems in the country, and the education system imports nearly everything it uses with taxpayer funding. This then trains students to develop nothing, but to import everything and preferably with taxpayer funding.

So there is no grass-roots or public interest in innovation inside the country, and no fire in the belly.

Those with a desire to develop something usually leave and go to another country.

It still doesn’t make sense. It’s conjuring.

There’s not enough R&D. Relative *to what*?

I think there’s not enough dancing girls. Does that mean government should fund them too?

I once read that a study (no doubt government-funded) found the health benefits of men gazing at women’s breasts for ten minutes is greater than for 30 minutes working out at the gym. So I suppose if the dancing girls were bare-breasted, the public benefits would be even greater!

Therefore couldn’t I emulate your reasoning thus:
o There are not enough dancing girls (no explanation why)
o We can demonstrate that there are benefits to society generally if dancing girls are funded (no explanation of why the benefits would be greater than those foregone from whatever other activities the funding has been withdrawn from)
o Therefore government (no explanation why government) should fund dancing girls.

Also, what if the intended beneficiaries suffer loss from acting on the basis of government’s research officers? For example farmers near me have acted on advice from the local Department of Primary Industry agronomists. Some have lost hundreds of thousands of dollars. That’s just ones I know; but these agronomists are giving advice throughout the district; and of course in other districts and states; and that’s only one section of one branch of one layer of government.

How would you know about these losses?
How would you take account of it in your economic modeling?
What remedy should the wronged parties have against the gumment?
What feedback mechanism would there be against the production of such wrong information?
What remedy should the taxpayers have against…. Who? You?

Peter. I would suggest that we will know the cost of not funding innovation only when our neighbours start out-competing us in economic production. There is no crystal ball, which is why innovation funding that includes less likely new technology is so important.
Given that Asian countries in general and China in particular has out done the West in Science and Maths education for a while now, if innovation was truly important then we should expect to see that innovation and leadership of the world's economy should shift to these countries...
Given that China now owns most of the debt of the western "developed" world, produces most of it's products, and is gradually taking control of resources, us included, I'd say the theory is looking pretty good!
One only has to study European history to see that science and high technology (plus cheap resources) is the main source of modern wealth.
One of the most successful R&D organisations in the USA has made many billions for the US manufacturers (now Chinese!) using the idea of "plan to fail 80% of the time". By aiming high, the 20% that do succeed are world first and truly innovative. Aiming low and looking for 20% ROI over 5 years is *not* how a nation should use it's portfolio...but it is perfectly suitable for individuals looking out for themselves.
Western "leaders" are selected based on boys club membership and their degree of bloody-mindedness. There are practically no scientifically literate folks in our board of directors club, nor our political tribes.
Bag Chinese government if you like, but at least they are going for educated types instead of aggressive last-century experts. They are building from a difficult history, whilst we are squandering our lucky status by letting rent-seeking conservatives steer us toward serfdom.

Hey Vanna...you say:

Wage costs are only a small portion of production costs, and high wage costs is the old excuse for lack of innovation in the country.

to which I reply.... you don't run a manufacturing business.. do you?
The fact remains.. Australian labor content vs Chinese labor content.. same time.. aah.. no comparison. End Price of product ?
Chinese LOWWWWW
Aussie HIGHHHH

Labor and compliance costs are a HUGE part of the picture.

You might be thinking of Germany for "higher wages, plus innovation"

I'll give the Krauts this.. they ARE innovative AND dynamic in industry.

Hmmmmmm...I *wonder*....could this just possibly be related to the fact that they also have a strong sense of Germanic racial solidarity ?
Hitler did some amazing things, (besides the bad)..and one of them was to instill in the German race a sense of RACE... and I assure you.. without it.. countries like Australia are doomed economically.

Unfortunately for us.. we can never capture such momentum because we are far too racially diverse. So.. I reiterate "we are screwed"

The progressives will be whistling along to 'celebrate diversity' all along the happy road to an unhappy ending over a sudden and unexpected cliff

Eight posts into a thread on 'innovation' of all things. I would have expected it to take longer.

Why innovate something if it is cheap enough to bye elsewhere. You can't reinvent the wheel.

Algoreisrich
I don't run a large manufacturing company, but I have worked in some, including one with a turnover of around $170 million per year.

Wage costs were about 20% of costs, and in fact that company actually produced a by-product that paid for everyone’s wages.

In manufacturing, wage costs are normally around 20% of costs, so if everyone’s wages were cut by 50%, it would only reduce total costs by about 10%.

Germany is a country that has higher wages and often better working conditions than Australia, and I found it quite disgusting when the NSW Education Dept spent $500 million of taxpayer's funding on purchasing software from a German company, after the education system has been teaching computing in schools and universities for nearly 40 years (ie. They couldn’t find an Australian company to produce the software after 40 years of education).

Also note that Australia is ranked 14th in the world for external debt.

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Not bad for a country of 22 million, but maybe if we try a little harder and import a little more we can make the top 10.

I remember when the Chinese were starving by the millions while great crowds were happily waving Mao’s little red book. I’d much rather see them trading peacefully and making themselves and others better off.

China proves the exact opposite of what you are urging. They aren’t succeeding by more socialism, but by less.

To say innovation is loss-making, therefore government should do it – to lead the way to a better economy - just doesn’t make sense.

“One only has to study European history to see that science and high technology (plus cheap resources) is the main source of modern wealth.”

Science and technology, of itself, doesn’t produce wealth. It has to be directed to a productive purpose – ultimately to satisfy human wants. In a modern technology, the methods of production are complex and roundabout. It is difficult enough for anyone to figure out how the factors of production can be combined in a profitable way, even with the direct incentive of ownership, and the ability to calculate what is more economical and what is less. It is virtually impossible without them. You are missing the most vital factor – economic freedom.

If the presumption were available that government can rationalize the scarcity of resources in such a way as to direct the factors of production to their most urgent and important uses, then it would be true that total governmental control of the economy would be better.

Innovation, in its nature, is anathema to bureaucracy which, without the instruments of profit and loss, must perforce resort to rules and regulations ultimately directed by arbitrary political demagoguery facing the above knowledge problem.

Also, innovation is important, but so are lots of other things. The only effect of government funding of innovation will be to waste funds that would have been better spent on innovation or other things.

Exactly the same arguments that are being used for government funding of innovation are used for government funding of everything else.

If they were true, their advocates should have no problem answering my questions. No-one has even tried.

@Peter Hume

Just what questions do you want answered? That government policy shouldn't encourage innovation?

Give me the questions you want answered and I will answer them and tell you how government policy can be made to encourage innovation and tell you how the current policy can be adjusted to get better social and economic outcomes.

Okay, thanks.

1. There’s not enough R&D: - relative to what?
2. How do you know that the other things people are preferring to spend their money on, aren’t more important or urgent to them, and therefore more deserving of the scarce resources that you want to divert to compulsorily-funded R&D?
3. The private capitalists presumably aren’t funding R&D as much as you think they should, because they figure it’ll probably be loss-making, otherwise they would fund it, take the profit, and should bear the risk. So the reason for government to fund it is *because* it’s most probably loss-making, is that right?
4. Will government funding of R&D involve privatising of profits and socialising of losses, and if not, why not?
5. If so, this will be rationalised by assuming that government know that this loss-making activity actually makes net benefits for society as a whole, is that right?
6. How would you prove that assumption?
7. How do you know that the total net benefit of the net beneficial projects, is greater than the total net costs to all Australians of all the government-funded R&D, including the violation of property rights in obtaining, the bureaucracy, the moral hazard, tragedy of the commons, the free-riding, the rent-seeking, the immorality of privatizing profit and socializing losses, and the opportunity cost?
8. How would you prove it?
9. If private parties, such as farmers, act on the basis of such R&D and it is wrong, and they suffer losses, how would you know about them?
10. How would you take them into account in your economic modelling?
11. Would the wronged parties have a remedy against anyone? If not, why not, and if so, who? In such a case, will taxpayers have a remedy and if not why not?
12. What feedback mechanism would there be against the continued production of such wrong information?

13. If any part of your reasoning depends on the concept of benefits to “us” or “society”, please define these sets of people? Are the people funding it and the people reaping the benefit the same, and if not why not?
14. If not, by what theory of property rights do you justify it?
15. The original problem is that resources are not going to their most urgent or important uses, as judged by the advocates of government funding of R&D. To justify government funding, we must assume that government has some kind of superior capacity to rationalize the scarcity of resources to their most urgent and important possible uses. How would you prove that assumption?
16. The reason private capitalists would make a loss in funding it is, by definition, because the consumers value the end product less than they value the factors of production that went into producing it. Prove that the actions of politicians in funding stuff that the people don’t want to pay for, would be more indirectly representative of the masses of people or the greater good however conceived, than the actions of those same masses of people in directly preferring something else for their money?
17. Couldn’t I argue that there’s not enough dancing girls and government should fund them, using the same reasoning? If not, why not?

BTW, I’m not asking how “government policy can be made to encourage innovation and … how the current policy can be adjusted to get better social and economic outcomes.” I’m asking how you know government can do it for a total net benefit , not a total net loss, considering all costs and benefits in their widest sense.

Hi all,

Mr J.B. Physics, research professor, McGorrie University, here.

Here's my problem:

I have a pet project that promises to make me into an instant facebook style billionaire if I play my cards right.

Government funding is not great, sure, but if I payroll assistants and students I trust and family and friends I can maximise the returns to myself if and when the project breaks through. The Yanks have already expressed great interest and could treble my funding if I move to the US.

Sure, this means less passion and enthusiasm for quality science teaching to the general student body. And in the long haul, Australia and Australians will end up clueless idiots when it comes to basic science. They already think that the Second Law of Thermodynamics means that computers and LCD screens will make everyone on the planet a billionaire within 10 years. That means Australians won't need so much R&D funding anyway because public expectations are lowered in deference to their new found aspirations.

Hey this is 2011 already and its gonna be MY year.

Peter

I am making the assumption that you agree that increasing productivity - which is doing more with less - is a characteristic that we wish our economic system to possess. I think you would agree that we want an economic system that grows and gives us more of the things we want for lower costs and with fewer resources.

If you agree then you need to support R&D because it is only through research and development that we increase our productivity. So called economies of scale come about because each time increase productive capacity we make the increased capacity more productive because we have learned from our previous efforts.

You seem to favour governments getting out of supporting R&D because you think that if there is a need then private capitalists will provide the funds because they will see there is a profit to be made. Unfortunately this is exactly the opposite to what happens in the real world.

There is an excellent book called "The Innovator's Dilemma" by Christensen that shows that the way we have organised our economic system means that innovation is very difficult to fund because our financial system works to kill off innovation and productivity improvements and to preserve the status quo.

The reason for this is that credit is only given to those with existing assets. Existing assets embody the ways we do things today. We only give credit to those who have a vested interest in stopping innovation because innovation reduces the value of existing assets. There are few funds for innovation or for building new productive assets. It turns out that there is always money available to help increase the price of existing output but few funds to drop the cost of producing new output.

This is a systematic problem caused by the way we issue credit.

Unless your recognise this then the solution I will suggest in the next post will not make much sense. (I have run out of space here and you may have to wait 24 hours for the next instalment)

We can fund innovation and R&D by using the scientific approach of experimentation. We decide to spend, say 5%, of our GDP on innovation. We will work out a way of spending this efficiently and we will measure the increase in productivity from our experiment. If we find we get a high return then we will keep increasing our expenditure until we start to get lower returns.

The question is how to spend the money efficiently. Here is what I would suggest.

Any person in Australia who wishes to participate can get the right to take out an interest free loan for up to say $3,000 per person. This money must be invested in R&D. The loan will be repaid from the income generated by the R&D. A person's loans are cumulative and the unsuccessful R&D loans must be repaid from a person's successful R&D.

Companies and individuals put up proposals for R&D and specify what it is they are going to work on and how they expect it will give a return - first to repay the loan and second to give income to individuals after the loan is repaid. Individuals now elect to invest their funds from this market place of proposals.

R&D monies are given every year. If the R&D monies are not spent on R&D (which is pretty easy to establish after the fact) then both the investor and the company and directors of the companies in which investments were made are banned from participating in the scheme for a period of some years and also agree to repay the monies invested.

People do not have to participate. Organisations do not have participate. Agent organisations can act as intermediaries and make the investments.

Because we know how much is invested. Because we know how much of the loans are repaid. Because we know how much is finally gained from the investments we are in a position to adjust the system to fine tune the experiment.

Could you please answer my specific questions?

Who is the “we” and “our” you refer to?

I myself favour increased productivity, yes. But there are lots of people who don’t. Many people on OLO complain bitterly about an economic system predicated on endless growth. They don’t agree with it. You haven't established that it's any business of government, just because you think it's a good idea. Why should the anti-growth types be forced to fund it? Why shouldn’t growth be funded by those who want to fund it, and not by those who don’t?

The argument you make is based on “our” credit system. But you and I don’t own or control the credit system. The manipulation of it that you refer to is done by *the state*, not by “us”.

your whole argument turns on the supposed need of credit to fund R&D.
Yet there is nothing about innovation, or R&D, that intrinsically requires funding by debt rather than by savings.

Thus
a) your argument doesn’t explain why debt funding is necessary
b) since the problem is state manipulation of the supply of money and credit, your argument doesn’t explain why the solution shouldn’t be to stop the government intervention that's causing the problem in the first place, rather than to start new, unjust and uneconomical interventions
c) you still haven’t proved that productivity would be greater with government funding R&D
d) even if you had, you haven’t proved that the total benefits would outweigh the total costs considered in their widest sense
e) you have disregarded the ethical dimension. Just because you, or I, want something doesn’t mean we're justified in forcing others to pay – the dancing girls argument.
f) If your assumption of government's superior knowledge were correct, it would mean that government could exercise total control of every productive activity in the whole economy, and we’d all be better off. This assumption is flatly incorrect

Peter,

Find me a person who does not agree with doing more with less. This is different from an economic system predicated on endless consumption of finite resources. We can have growth with reduced consumption of finite resources.

You and I (as members of a community) DO own the credit system and it is time we took responsibility for its proper functioning. Credit is a promise to pay and credit only exists in communities that uphold that promise.

My argument is that R&D brings about productivity improvements and productivity improvements increase wealth. I am very much in favour of increasing wealth. To do R&D we have to have funding.

The current method of funding R&D through savings (or interest bearing money) is very very expensive. The existing system does not allow funding of R&D through loans. You cannot go to a bank and get a loan for R&D. Loans are a much cheaper way of funding particularly if the loans are interest free:)

My suggestion is not forcing anyone to do anything. You don't have to take out an interest free loan if you don't want to. If I repay my loans then who is paying? It is me not someone else so whom am I forcing to pay?

The proposal is a free market that decides where and how money is invested. The amount is decided by the outcomes of the investments.

It is innovative and it will get fierce opposition from those who have access to credit simply because they already possess assets.

Nothing in what is suggested changes the existing system except it makes the R&D activities of the government redundant. It eliminates the need for tax concessions and other attempts by governments to encourage R&D. Even better it will cost the government next to nothing to implement.

It requires the government to set in place the policies to make it happen. It is just that the policies are a little different to those currently in place.

BTW when I put this forward to get an innovation grant to explore the idea further it was rejected:)

Fickle Pickle,

Well I quite like your ideas.

As well, if superannuation payments are compulsory, then government policy could be that a certain % of the money invested by superannuation companies must be spent on R&D in Australia.

This would help to stimulate or resurrect public interest in innovation in Australia, which I believe has been killed off by government policy and the education system.

Fickle Pickle
Well you asked for my questions and promised to answer them, I asked them, you didn’t answer them, then I asked you to answer them and you still didn’t answer them.

I suspect that the reason you didn’t answer them is because you can see that if you do, they will show that your policy proposal is indefensible in its own terms.

Could you please answer my numbered questions specifically.

All your reply only begs my questions: there’s not enough R&D: relative to what? How do you know the scarce resources necessary to fund it would not be better applied to some other end?

“Find me a person who does not agree with doing more with less. This is different from an economic system predicated on endless consumption of finite resources. We can have growth with reduced consumption of finite resources.”

True.

But
a) if everyone agreed, there would be no need of policy to force the issue in the first place, so obviously there are people who disagree
b) many people oppose economic growth
c) they can do so consistent with the fact that people intrinsically want to do more with less, because you have not shown how the policy you advocate would distinguish between 1. doing more with less, and 2. doing more with more
d) you still haven’t established any justification for government funding of it.

“You and I (as members of a community) DO own the credit system and it is time we took responsibility for its proper functioning.”

No we don’t. Society is not the state, nor vice versa. You and I have, in practice, NO control over monetary policy.

There is no issue, is there, that loss-making projects don’t increase productivity? Losses don’t increase productivity – they reduce it.

Therefore government funding of R&D would only make sense if the projects produced a net benefit. But government is in a *worse* position than private capitalists to identify those projects.

Thus you haven’t even begun to establish a case for government funding of R&D.

“The proposal is a free market that decides where and how money is invested. The amount is decided by the outcomes of the investments.”

I’m all in favour of that, but that is not an argument in favour of government funding innovation – it’s an argument against.

“It requires the government to set in place the policies to make it happen. It is just that the policies are a little different to those currently in place.”

What is the difference between what you are suggesting, and the abolition of all governmental policy and interference whatsoever to do with R&D?

“BTW when I put this forward to get an innovation grant to explore the idea further it was rejected:)”

LOL

“BTW when I put The Second Law of Thermodynamics forward to get an innovation grant to explore the idea of its "application to optimise human endeavours" further,
it was rejected on the grounds that the Second Law was now generally accepted to be false, to be replaced by the upcoming Theory of Divine Human Capitalist Intervention. :)”

Funny huh?

Now that's Humer for you!

LOL

We're setting sail
To the place on the map from which no one has ever returned
Torn by the promise of the joker and the fool
By the light of the crosses that bur-urn
Torn by the promise of the women and the lace
And the gold and the cotton and pearls
It's the place where they keep all the darkness you meet
You sail away from the light of the world

Listen baby - you will pay tomorrow
You're gonna pay tomorrow-ow-ow
You will pay tomorrow-ow-ow-ow-wow-ow-ow-ow-ow-ow

Save me, save me from tomor-orrow
I don't want to sail with this ship of foo-ools, no no
Oh-oh-oh, save me, save me from tomor-orrow
I don't want to sail with this ship of foo-ools, no no
I want put on the Meissner shield to run and hide

Avarice and greed are gonna drive you over the endless sea
They will leave you-ou drifting in the shallows
Drowning in the oceans of history-y-y-y
Travellin' the world, you're in search of no good
But I'm sure you're philosophic like I knew you would
Using all the good people for your galley slaves
As your little boat struggles through the the Second Law warning waves

Peter,

You haven't understood what I am proposing. If you look through you will find that what is being proposed is a decentralised market place in Research and Development where we give the R&D funds to every citizen to invest. It is not a government directed approach but governments do what they are supposed to do and provide the infrastructure and rules so that markets can operate successfully. I am as much against government control of R&D expenditure as you are but governments are the only ones who can set in place a framework to make a R&D market place operate.

At the moment there is no market place in Research and Development because the potential buyers are those that have the most to lose from innovation. The existing suppliers are also frightened of losing their strangle hold on funds. Governments like to be seen to be doing good things hence not very much happens.

There's not enough R&D- relative to what?

How do you know?

"...we give the R&D funds to every citizen to invest."

Who's "we"?

Where are you going to get the funds from?

How do you know that the benefit to society from what the funds would otherwise have been used for, would not be greater than the benefit to society from spending it on R&D?

There's no issue, is there, that if the funds went to loss-making projects, they would not increase productivity, and this would not be a justified use of funds.

Just because other people don't want to pay for what you think they should pay for, doesn't mean you're justified in forcing them, any more in R&D, than in any other field.

Peter

The method I am suggesting is called "the scientific method". In the scientific method we postulate a hypothesis and then we run an experiment to see if the hypothesis is FALSE.

The hypothesis is that R&D is a good thing for society. This hypothesis is based on good evidence that most advances in our well being have come because we better understand our world through the process of R&D.

We run the experiment as described and we measure the outcomes. If we find that R&D increases productivity then we continue the experiment if not we think of some other hypothesis to test.

So the answers to your questions are we make an educated guess as to how much everyone gets and I would start with $1,000 interest free loan to anyone in Australia who wants to participate. No one is forcing anyone to do anything. People do not have take up an interest free loan if they don't want to.

The method of issuing these loans is also an experiment but the hypothesis is that it will be non inflationary. The reason why this is an interesting experiment to run can be found at http://cscoxk.wordpress.com/2011/01/26/credit-as-a-tragedy-of-the-commons/

The objective of the R&D experiment is to answer the question if the benefits from the R&D outweigh the costs. The objective of the interest free loans experiment is to answer the question whether increasing the money supply with interest free loans for productive purposes will stabilise the monetary system.

Scientists do not believe they have "the answer". They have theories and they design experiments to test those theories. If the tests show the theories are wrong then they change the hypothesis. Scientists do not prove things are true. They show things are not false.

Both these hypothesis may be wrong but even if they are wrong there will be little harm done because we know that R&D does sometimes do good. We also know that creating a limited amount interest free loans will do little damage. It is certainly cheaper than giving tax dollars or getting interest bearing loans for R&D.

You said you’d answer my questions but you keep evading them.

For the scientific method to be valid, the hypothesis has to be logically coherent in the first place. Yours isn’t, because it contains an aggregative and a logical error.

The experiment as described is “that R&D is a good thing for society”.

It is *specific* R&D that produces good things for society, not R&D *in general* including R&D-that-produces-no-good-thing-for-society.

You essentially jump from the premise that “R&D” (in general) is a good thing for society (which as shown is fallacious) to the conclusion that THEREFORE government should promote it, which is a non sequitur, and therefore doubly fallacious.

The very issue is *how* to distinguish R&D that does produce good things, from R&D that doesn’t; and your experiment doesn’t distinguish between them.

The hypothesis is also logically fallacious because it can’t be falsified.

1. How could you prove false the proposition that R&D in general is a good thing for society?

“If we find that R&D increases productivity then we continue the experiment ....”

2. *How* would you measure the outcomes of your experiment without wrongly attributing to non-good-thing-producing-R&D, the benefits of good-thing-producing-R&D?

“So the answers to your questions are we make an educated guess as to how much everyone gets and I would start with $1,000 interest free loan…”

3. Who’s “we”?

“No one is forcing anyone to do anything.”

4. How are you getting the money? Are you going to lend me $1000 of your money interest-free are you?

“The objective of the R&D experiment is to answer the question if the benefits from the R&D outweigh the costs.”

5. How will the benefits and costs be determined if not by profit and loss?

6. How do you know that the benefit to society from what the funds would otherwise have been used for, would not be greater than the benefit to society from spending it on R&D?

Your reasoning is shot through with aggregative errors, and I will undertake to prove it, if you will be so good as to answer my numbered questions.

1. The definition of R&D that I will use that can be used to disprove the idea is that if the aggregate cost of R&D is less than the income received from the commercialisation of the R&D over the life of the innovation arising from the R&D then in aggregate R&D has failed. Under this definition aggregate R&D has not yet failed.

2. If the measures we use in (1) fail for the areas where we explicitly decide to spend on R&D then that R&D has failed - unless the other non monetary benefits are judged to be sufficient to justify the loss.

3. "We" are all members of our community which for this exercise can be all Australian Citizens.

4. The money comes where it all comes from - as a loan. There is no "law" that says loans cannot be given at zero interest and to give a historical reference the CBA gave zero interest loans to the Australian Government to pay for the First World War as well as build much of the post world war I physical infrastructure.

5. Yes I agree we measure cost benefits with costs and benefits. But I also believe that there are other valuations that do not involve putting a price on something. I believe it is wrong to subject someone to torture even though it may be the most cost effective way of getting information.

6. I don't know if R&D is the best use of funds and have never claimed it to be so. This is where you and I part company. You think value can be determined purely in terms of price people are willing to pay. Financial measures can be used to choose between different ways of doing a particular thing like the best way to say produce renewable energy. However, the decision on whether we should create energy from renewable sources or from burning finite resources is a judgement decision of which financial cost/benefit is but one (important) input.

Thank you. I submit my disproof as follows.

1.
“Income” means *net* income, after costs, right?

So why wouldn’t this reasoning apply to everything else, for example agriculture? If the aggregate net profit of all agriculture is greater than the aggregate costs of all agriculture, therefore agriculture in general is a good thing for society, and therefore society – and therefore government - should fund even loss-making agriculture, such as farming salamanders?

2.
Then why not fund it on the basis of profit and loss for individual projects, rather than aggregating R&D? You still haven’t got around the original problem. (Temporarily putting aside values outside money calculation) it’s the profitable R&D that produces demonstrable benefits for society, *not* the loss-making R&D.

3.
Not everyone in the community is a citizen, not all citizens vote, of those who do, not all vote for the major party, of those who do, not all agree with their decisions, and of those who do, not all pay for them. Besides, the innovation is presumed to benefit all human society, not just Australian taxpayers. So why should only 0.36 of one percent of the beneficiaries be forced to pay? I told you there’s aggregative errors all through your reasoning. What theory of property or ethics justifies your proposal ?

4. “The money comes where it all comes from - as a loan.”

Still not clear – WHO is going to lend WHOSE money to WHOM? Will all money be obtained by voluntary means? If not, why not? This is the central issue which underlies all the other issues: epistemological, ethical, economic, practical.

If you’re saying that everyone who wants to fund probably-loss-making R&D should be free to lend their own money interest-free, I agree. But you’re not saying that, are you? You’re saying people who DON’T want to fund it, should have the money taken from them by force and threats by the state, aren’t you?

5.
Yes, the question is, *who* is to do the valuation – the owners of the property, or someone who took it by threatening to physically violate him?

6. “I don't know if R&D is the best use of funds and have never claimed it to be so.”

Well if you don’t claim to know that it would be better spent than the alternative uses of the same resources, then you haven’t justified any policy.

“You think value can be determined purely in terms of price people are willing to pay.”

No I don’t. On the contrary, money being a *medium* of exchange - a means to other ends - ultimately the values are ends in themselves and therefore no values can be determined purely in terms of price. All economic calculation demonstrates is that one prefers satisfying the particular value over having the money, that is all, including in the values against torture and abuse. What we’re saying is, no exchange value ranks higher.

Therefore you have not shown
1. why funding decisions should lump loss-making R&D with profitable R&D
2. why R&D is in any different case, as regards government support, from any other thing that benefits society
3. that government represents people better than people represent themselves in deciding whether or not to fund R&D
4. how government would be in any better position to distinguish worthwhile from wasteful R&D, either with or without economic calculation as a mean of judging which values should have priority
5. any rational justification of any government support of any R&D.

1. You are correct. The reasoning does apply to any area of society and that is what makes it so powerful. We do have areas where - in our collective judgement through politicians - we need to direct resources. The Queensland rebuilding is a recent one. See http://cscoxk.wordpress.com/2011/01/21/funds-for-queensland-flood-relief/ to see how the method can apply to that problem.

2. Profit is largely determined by price and price has little to do with cost and little to do with value. Price enables us to choose between things and so is a comparative measure. However for most of our purchases prices are determined by how much a person is willing or able to pay. It is only loosely related to cost and value. We want a system where we can direct resources more closely to those things of greatest value for least cost. Unfortunately profit - because it is so heavily determined by price - is not enough to get resources directed to getting the greatest value.

3. As I keep telling you what is proposed is voluntary. You do not have to take out an interest free loan if you do not want to. No one is forcing anyone to do anything.

4. Money is a token of value. Money in itself has no value. It is only of use when there is agreement that we can exchange it for things of value. When we increase the number of money tokens in the system then those tokens should not have value in themselves. Our dysfunctional financial system is caused by the new tokens having a value because they are created when interest bearing loans are made and there is not enough money tokens in existence to make the loan. We can stop "the business cycle" recessions depressions by introducing extra money tokens into the system as interest free loans.

“The reasoning does apply to any area of society ...”

So in theory, there’s no reason why government couldn’t and shouldn’t take over any area of society?

“We do have areas where - in our collective judgement through politicians - we need to direct resources.”

You still haven’t justified your *assumption* that that politicians represent the people better than the people represent themselves.

You, and the author you cite, have not shown why government has any superior knowledge, virtue or competence in the first place.

2.
We know that price is *directly* related to value in that a person, in buying something, demonstrates that he values the good more than whatever else he could have got with the price.

Therefore you haven’t demonstrated that
a) profit is not enough to get resources directed to getting the greatest value
b) politicians would be in any better directing position – in fact they would be in a far far worse position, that’s the whole point.

“As I keep telling you what is proposed is voluntary.”

You keep on not-answering where the real capital is going to come from. *Receiving* stolen money is always voluntary. It’s *paying* it that’s the problem.

“No one is forcing anyone to do anything.”

That’s the situation now, so there’s no need for any policy is there?

4.
Agreed, money has no intrinsic value.

However if the government increases the number of new tokens they will still function as a medium of exchange for real goods, which is your whole purpose. They will function to divert capital from elsewhere, by diluting the currency, and stealing from everyone who uses money. It is this diversion of capital that is in issue. Whether or not the tokens are interest-bearing is completely irrelevant.

You still have not demonstrated that the ethical or economic benefit to society from withdrawing the property in issue by force or fraud from those who earned it, would be greater than the ethical or economic benefit to society from spending it – by politicians of all people! - on loss-making R&D projects.

It’s voodoo.

Also, if the tokens functioned to buy future goods in the present, then WHAT POWER ON EARTH COULD STOP PEOPLE ASCRIBING TO THEM A VALUE IN THE NATURE OF INTEREST? How would you stop the people who use them, from offering or accepting charges in the nature of interest?

Peter,

This is getting nowhere. You have your opinions which seem to be pretty well fixed. You seem to believe that we don't need to do anything as a community to encourage innovation.

I disagree with that opinion and believe that we can increase wealth at a greater rate by encouraging R&D and innovation.

The innovation proposed is to issue interest free loans for innovation and R&D and I have proposed a market based method of distributing the loans.

I do urge you to read Christensen's book on "The Innovators Dilemma" and you will see why we are not doing as well as we could.

We cannot prove beforehand if any system will work. We can prove it does not work after we build it. Your insistence on proving that paper models will work cannot be achieved. Paper models prove nothing. Building real systems and seeing if they work or not is the way we advance.

Planning reduces risk but no paper models will ever prove anything. At some time we need to take a punt and to innovate in order to advance.

Our current system is increasingly stifling innovation and those of us in the middle of it see how much more difficult it is becoming with each passing year. Your opinion that the system is "good enough" is exactly the sort of attitude that halts innovation.

Your judgement is to do nothing and it will all happen like magic. My judgement - like Gruen - is that we need to do something. There are many different ways of doing something. In other areas of life we have seen that trying many different ways is the best way to find the best way.

The problem isn’t that we’re getting nowhere. It’s that I am consistently logically disproving your arguments and you are not recognizing it because you have an unfalsifiable belief system.

“We cannot prove beforehand if any system will work. We can prove it does not work after we build it.”

That is not correct. We can proved beforehand – on paper - that a system will not work WITH 100% CERTAINTY. Your belief that nothing can be proved in theory would only be true if the laws of physics and logic do not apply to human action.

For example, we already know beforehand, that you can’t endlessly increase production by endlessly increasing the amount of fertilizer you put on a piece of land.

Don’t we?

Therefore I have proved you wrong.

Another classic example is Mises proof that economic calculation is impossible under socialism. This proved that, if tried, the result would be economic chaos, political totalitarianism and mass starvation.

Yet the socialists, ignoring this and following your belief system that nothing could be proved or disproved in theory, went right ahead and provided the disproof *in practice* – at a costs of over 100 million deaths – and all the economic chaos and political totalitarianism anyone could possibly want.

Yet you still have THE SAME BELIEF – that government could run “any area”. When faced with disproofs, you simply ignore them and carry on circularly repeating the same disproved fallacies.

It’s you who believe in magic. I have disproved your belief that we can create net wealth by forced redistributions, and you haven’t even recognized the fact.

The flaw in your argument is this. You have IGNORED the negative effect of government on innovation, have IRRATIONALLY INFLATED the positive effects, and have falsely confounded the community with the state.

It’s not that we’re talking past each other; it’s that you haven’t got to square one in establishing your case. You are just circularly repeating false beliefs; no better, and no different, than reciting a belief in the magic of rain dances or sacrificing virgins.