Why Pay for Science?

Mike Smitka

In my Industrial Organization class we chatted about the logic of funding basic science in a world of which the US is an ever-smaller slice.^[1] The economic gains to basic research remain highly uncertain, and applications may not come for decades.^[2] Furthermore, science is mobile: conventions are international in nature, results – in economics, working papers indexed HERE – are disseminated rapidly. So aren't the incentives to free ride? At the level of a US state there's no obvious need to fund basic science, yet the focus of "flagship" universities is just that (and liberal arts colleges such as Washington & Lee face pressures from accreditation, reputation and faculty peer pressure to be mini-Harvards).

The public policy temptation is to free ride upon the R&D expenditures of others.

One retort is that while Science may be borderless, tacit knowledge remains important and "lab rats" and their equipment aren't mobile. The benefits come from commercialization, which benefits from ready access, hence we should find activities co-locating, with a research university the magnet. So there's a body of work on the geography of biotech firms and semiconductor firms, whether you get clusters of high-value-added enterprises with high growth potential centered around universities. I don't know the current state of the literature, but I strongly suspect that if you could undertake a cost-benefit analysis, the magnitude of the benefits of such spin-offs is a fraction of the cost of funding PhD programs.

Now in fact some states have been dropping their funding. In both Virginia and Michigan the public component of UVA (15%?) and UofM (5%?) is modest. In effect, they've become private schools building upon large investments in plant and equipment funded by state taxes but reliant on outside grants and alumni support for ongoing operations. What of a University of South Dakota or a University of Arkansas? Have they maintained funding? I don't know – it might be a good term paper topic when I teach the class in 2014!^[3]

In any case, research universities look to benefit financially from R&D technology licensing. The patent component of that can be tracked, but not all technology is covered by patents.^[4] Now I'm not sure that's a great argument when approaching the state legislature – doesn't that translate into a case for cutting support? But it certainly is part of the wider discussion of the benefits of funding R&D. So here the NYTimes science section reports that "Patenting ... Does Not Pay...". The underlying Valdivia Brookings study is part of a larger project on technology – see for example the Rothwell et al. Brookings paper on the regional nature of R&D. But what Valdivia focuses upon is the growth of Technology Transfer Offices. His 1999 base consists of TTOs in 174 institutions, up from 30 in 1979 (there are more TTOs today). He tracks their performance through 2012. Only 8 of these universities generated substantial revenue; most TTOs did not even cover staff expenses.

The danger is that no one will fund R&D.

So should states fund university research? The thrust of the Brookings project is that there are a lot of spinoffs. But to me the small number of winners (most patents come from a handful of metropolitan areas) suggest that it's good national policy but not good state-level policy – indeed Brookings work also shows that Federal R&D is more productive. That leaves open the question of who should fund "STE" (science-technology-engineering) training. The danger is that no one will fund it.

Note 1. Cf. Einstein's 1905 work on the photoelectric effect, which lies behind the xerox machine. The first patent drawing upon that did not come until 30 years later – Chester Carlson's first "electrophotography" patent of 1938, using a zinc plate and sulfur powder, not a selenium drum and carbon toner. Practical development did not start until 1946 and the first plain paper copier was not launched until 1959, though along the way the Haloid Corporation (later renamed xerox) developed specialized copiers for lithography and microfilms. [Photomultiplier tubes date back to 1934, building on a 1919 patent, and related experiments aimed at developing a TV camera using the photoelectric effect go back at least to 1926, so the "first" above is specific to copying technologies.]

Note 2. With a population of 316 million, we remain a large slice of the global economy even with the growth of China and Brazil and {hopefully} India and sub-Saharan Africa.

Note 3. Brookings claims that state R&D funding is increasing, Federal declining. See here. It's a brief note so provides no data, but outlines a version of the public good externality argument motivating this post.

Note 4. One anecdote – which is not "data" only an indication that exceptions exist – is flu vaccines. The underlying R&D was done at the University of Michigan (mea culpa: my brother worked in that lab for many years), and it continued to do the legwork of turning out the actual base vaccine, which includes various flu strains basic on work predicting which would be prevalent in the next flu season. Actual production was then handed off to commercial vaccine companies. When the head of the lab retired, it was closed and all work was transferred to outside commercial firms – none in Michigan. We as a society benefit enormously from that work, and likely most of the funding was Federal. But the commercial benefits didn't come back to benefit Ann Arbor, and private benefits are certainly not restricted to US citizens!