Government’s role in promoting research

Superb speech by Chairman Bernanke (he is too good on topics like these, becomes  a Prof which is so natural to him).

For sustained growth one needs to promote research and innovation. Governments should help build environments which promote these innovations and help sustain growth.

Innovation has not only led to new products and more-efficient production methods, but it has also induced dramatic changes in how businesses are organized and managed, highlighting the connections between new ideas and methods and the organizational structure needed to implement them. For example, in the 19th century, the development of the railroad and telegraph, along with a host of other technologies, were associated with the rise of large businesses with national reach. And, as transportation and communication technologies developed further in the 20th century, multinational corporations became more feasible and prevalent.

Economic policy affects innovation and long-run economic growth in many ways. A stable macroeconomic environment; sound public finances; and well-functioning financial, labor, and product markets all support innovation, entrepreneurship, and growth, as do effective tax, trade, and regulatory policies. Policies directed at objectives such as the protection of intellectual property rights and the promotion of research and development, or R&D, promote innovation and technological change more directly.

He looks at why government should  be funding research:

Governments in many countries directly support scientific and technical research, for example, through grant-providing agencies (like the National Science Foundation in the United States) or through tax incentives (like the R&D tax credit). In addition, the governments of the United States and many other countries run their own research facilities, including facilities focused on nonmilitary applications such as health. The primary economic rationale for a government role in R&D is that, absent such intervention, the private market would not adequately supply certain types of research.

The economic arguments for government support of innovation generally imply that governments should focus particularly on fostering basic, or foundational, research. The most applied and commercially relevant research is likely to be done in any case by the private sector, as private firms have strong incentives to determine what the market demands and to meet those needs

However, if there are failures in govt promoted research, it weakens the case. There are both cases of failures and successes:

Of course, the rationale for government support of R&D would be weakened if governments had consistently performed poorly in this sphere. Certainly, there have been disappointments; for example, the surge in federal investment in energy technology research in the 1970s, a response to the energy crisis of that decade, achieved less than its initiators hoped. In the United States, however, we have seen many examples–in some cases extending back to the late 19th and early 20th centuries–of federal research initiatives and government support enabling the emergence of new technologies in areas that include agriculture, chemicals, health care, and information technology. A case that has been particularly well documented and closely studied is the development of hybrid seed corn in the United States during the first half of the 20th century.

Two other examples of innovations that received critical federal support are gene splicing–federal R&D underwrote the techniques that opened up the field of genetic engineering–and the lithium-ion battery, which was developed by federally sponsored materials research in the 1980s.  And recent research on the government’s so-called war on cancer, initiated by President Nixon in 1971, finds that the effort has produced a very high social rate of return, notwithstanding its failure to achieve its original, ambitious goal of eradicating the disease.

He points US govt expenditure on R& D has been declining.

Then say, govt decides to promote R&D, what should be done? What are the tools?

If the government decides to foster R&D, what policy instruments should it use? A number of potential tools exist, including direct funding of government research facilities, grants to university or private-sector researchers, contracts for specific projects, and tax incentives. Moreover, within each of these categories, many choices must be made about how to structure specific programs. Unfortunately, economists know less about how best to channel public support for research and development than we would like; it is good news, therefore, that considerable new work is being done on this topic, including recent initiatives on science policy by the National Science Foundation.

Certainly, the characteristics of the research to be supported are important for the choice of the policy tool. Direct government support or conduct of the research may make the most sense if the project is highly focused and large-scale, possibly involving the need for coordination of the work of many researchers and subject to relatively tight time frames. Examples of large-scale, government-funded research include the space program and the construction and operation of “atom-smashing” facilities for experiments in high-energy physics. Outside of such cases, which often are linked to national defense, a more decentralized model that relies on the ideas and initiative of individual researchers or small research groups may be most effective. Grants to, or contracts with, researchers are the typical vehicle for such an approach.

He says allowing immigration and allowing skilled people to come is another way to boost R&D.

Nice speech. There is a nice reference list as well.

I was just wondering isn’t this somewhat similar to hated Industrial Policy? Say if the government sponsors initial research in computers/software which leads to development of the whole industry (which is the story of how silicon valley actually developed). Now if some economist calls it a success of industrial policy, it is abhorred. The moment it is called as R&D policy, it is deemed fine. Similarly above mentioned examples of war on cancer helped develop cancer fighting industry. So again, it is like Industrial Policy.

I would think this term industrial policy has been marketed as interventionist policy which is inefficient and has many failures. It is seen as government directly participating in economy setting up industries. However, there are other variants of industrial policy like R&D policy which can have great outcomes if done properly. There would be failures but then it is part and parcel of life.

3 Responses to “Government’s role in promoting research”

  1. pravin Says:

    well,you chose the wrong example wrt computers.the IT industry in india took off without govt intervention-especially because the govt had no clue what it was all about.
    bernanke is implying that the internet or lithium technology would not have succeeded without govt grants. there is no proof of that.the govt has no clue which technology will succeed .it can only redirect money from one set of people to its favorite rnd bondoogle.currently it happens to be green energy or whatever the algoreans want.this doesnt mean that something good will not come out of it.but economics is about the unseen.what is not seen are the technologies that would have arisen ,given no govt dirigisme.the big successes of today are google and social networking -the govt would have no idea in 1990s about what research to fund. bernanke makes no convincing arguments at all.just repeats old interventionist drivel.he is very adept at that.

    • Amol Agrawal Says:

      I wasn’t talking about Indian software industry at all. I was talking about US. It is well known that silicon valley developed because of several government policies to push computer technology in defence sector. Read Dani Rodrik on the same. There are many examples in East Asia as well.

      There is little doubt that government is mostly clueless about these things. But then that is what Bernanke also says — we really do not know how to identify the right projects for Govt. R&D

  2. Home Theater Surge Protectors Says:

    Monster Surge Protectors…

    […]Government’s role in promoting research « Mostly Economics[…]…

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