@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.