Academic exercises

Sinclair Davidson had a piece in the Fin the other day, attacking the Australian Research Council, which pays my salary (Davidson also gets ARC Grant Money, as he notes). The argument turns, not on specific deficiencies of the ARC but on the general claim that pure research undertaken with government funding has little economic benefit. In the good old days, when confronted with this sort of claim, we research types would wheel out a few trusty examples like cactoblastis and ENIAC, but they’re getting a bit old and tired nowadays.

I remember talking about this a decade or so ago, and somebody said the universities were developing this great new communications system that would revolutionise the economy. What was it called? Interweb? WorldWideNet? Mosaica? Can anyone remember what happened to it? If someone could find any evidence that this idea had an economic impact, it might help to counter Sinclair’s argument.

To be serious, although the early development of ARPANet was funded by specific grants on the ARC model (in this case from the US Department of Defence), and the same was true of some aspects of the Internet in other countries, most of the development of the Internet was not the result of targeted funding but the outcome of all sorts of spare time activities and voluntary contributions, reflecting the general belief among academics that free interchange of information is a Good Thing. Still, this doesn’t seem to help Davidson’s argument, since he wants tighter political controls over research funding and (I presume) more of the kinds of market pressures that discourage any activity that doesn’t contribute directly to a university bottom line. The development of the Internet was just such an activity, and it came, almost entirely out of publicly funded research institutions[1]

fn1. The one important exception was Unix which came out of Bell Labs, the kind of quasi-public institution that flourished in the US corporate sector before the days of shareholder value.

47 thoughts on “Academic exercises

  1. “the universities were developing this great new communications system that would revolutionise the economy”

    We now have 3/4 of the public sector and academia spending copious otherwise “productive” hours blogging and surfing the internet looking at God knows what everyday. More a evolution in the form of bludging than a economic revolution. The “net” benefit of the internet is debatable.

  2. You can use Forth as whinge material, but I was trying to make the point that it emerged from – and is in fact still used in – a different development/implementation/use environment than either academia or the corporate world. I wanted to show that these do not exhaust the spectrum, and that therefore recommending an academic approach to pick up what the corporate approach misses would be worth it but would still not reach all the possible lines of enquiry. That’s because of the intrinsic structures of academia, just as real as those of the corporate world.

  3. Stephen — there are plenty of examples of the free market coming up with technology that didn’t make commercial sense. Lots of technologies were effectively accidental biproducts of other experiments… and the free market is full of experiments.

    Philanthropy is always a good cause. And fame. As is human curiosity… which is probably responsible for more break-throughs that the market and the government combined. I know I do a lot of my research for fun and curiosity. It is simplistic to assume that the choice is between government research and no research or that government activity does not crowd out private activity.

    My statement about research failing BCAs and my lack of faith in BCAs are consistent… just badly worded. I think they would fail a good BCA. 🙂

    Q — I can get a 39% social rate of return for most things. Adding the word social lets me play lots of silly games with huge uncertainty to get you whatever number you want. Also, it would be interesting to see if that is an internal or external rate of return. Most people report IRR, but that is a shockingly unhelpful concept and prone to much confusion (such as comparing it with the welfare cost of tax).

    Of course, the most common mistake with DWL is not to consider it at all.

    Also, if DWL is 20c for one dollar and the program is making 39c in the dollar… isn’t the net return 19c? Depends on how they reported their return (but I can’t read it at this computer).

    Further, that return needs to compensate for risk as well… which makes it even less impressive.

    Dave — I live on interest of about 3% a month… so it can be done. 🙂 And I am aware that the positive reports are released (though I can’t open it at this computer for some reason). It’s the negative reports that are hidden. Further, in comparing with your investments your confusing welfare return with financial return.

  4. “Also, if DWL is 20c for one dollar and the program is making 39c in the dollar… isn’t the net return 19c? Depends on how they reported their return (but I can’t read it at this computer).”

    Work it out. If $1 worth of post-tax investment costs $1.20 pretax, then an annual return of 39 cents per post-tax dollar gives you a rate of return of 0.39/1.20 which is a little over 0.32.

    That’s what is meant by a rate of return (internal or external). If the report said that an investment of $1 gave a once-off return of 39 cents, then you would be justified in subtracting the 20 cent deadweight loss.

    As regards social rate of return, my point went the other way. If the projects produce a cash return to governments, then there’s no need to worry about the welfare cost of tax.

  5. Without reading the report I wasn’t sure if they hadn’t simply reported the B/C ratio as the return. It wouldn’t be the first time. But as you can read the report and I can’t… I defer to you.

    I didn’t understand your last point about the social rate of return. My point was that the concept is easy to abuse, especially when the research institutes are asking for a bunch of questionable intangibles to be included as social benefits. If the projects are returning a cash return, then there is no need for the government.

    Not wanting to labour the point… but the difference between the IRR and ERR is not trivial.

    SJ — I retired last year. I’m living off returns of about 3% a month. Believe it. If it’s not true… then I don’t know who is paying for my travels, but I thank them. 🙂

  6. It’s possible to live off real interest of 3% per year while conserving capital (read the Forsyte Saga, all that talk of consols), provided there was enough capital to begin with. It’s possible to live off nominal interest at that level while drawing down one’s capital, but then one is betting on not outliving the capital.

    On the other hand, 3% per month would conserve capital, but is probably very risky financially (unless it was some sort of sweetheart deal).

    And of course none of this works very well if there wasn’t enough capital.

  7. derrida derider, thanks for the link. I’ve had a quick skim and it looks very interesting.

  8. SJ —I retired last year. I’m living off returns of about 3% a month. Believe it. If it’s not true… then I don’t know who is paying for my travels, but I thank them. 🙂

    So you’re saying returns now, not interest. OK.

    My own portfolio has returned almost three times that much over the past two years. I have the sense not to refer to that (mostly) capital gain as interest. I also have the sense to recognise that the post Iraq-invasion run up on the Australian stock market is a rather peculiar circumstance, one which may result in you trying to live off negative “interest” in the future.

    Regards
    SJ, MApp Fin

  9. I don’t invest in the stock market and I wasn’t talking about capital appreciation. 3%/month has been pretty consistent so far.

    Anyway — my point was simply that it can be done (getting >30% a year in private investment)… not to get into a semantic debate.

    690% return over the past 2 years is very good. Congratulations — hope you keep it up.

  10. JH, Sure there are plenty of examples of the private sector technologies that were good, but not that commercially viable. But these fall into three classes. There are those that are accidentaly spinoffs from research for other things, there are those that are basically philanthropic, and there are those that are prestige technologies, done for marketing purposes.

    However, none of these categories can cover the bulk of things government research does. There is not enough philanthropic money to go around. Getting government out of research might increase this a little (in the short term – it would cause it to go down in the long term as the economy collapsed taking philanthropy with it) but nothing like the amount needed to fill the gap. Prestige technologies are few and far between by their nature, and only a few companies can afford the expensive ones.

    Accidental spin-offs are the most interesting really. Sure its true that sometimes a company is looking for one thing and finds another. But what is far more common is when basic research leads to something unexpected (remember pennicillin? I seem to recall it was quite good for society). And who funds basic research – governments. A few corporations do – I think the work for high temperature superconductors was done by IBM, but they’re never going to cover the range. All that the spin-off arguement does is emphasise just how valuable government research really is.

  11. 690% return over the past 2 years is very good. Congratulations—hope you keep it up.

    I don’t think your grasp of the math is very good.

    You claim you’re getting paid interest of 3% per month. You also say you’re living on this, so you aren’t re-investing. That gives you about 36% p.a.

    My claim is for about 100% p.a., i.e., almost 3 times 36%. I can’t see where a number resembling 690% drops out.

    I think there are a few possibilities here:

    a) you’ve got a sweetheart deal, as P.M. Lawrence suggested

    b) you’re being conned

    c) you’re involved in the type of money lending that involves broken kneecaps

    d) you have no idea what you’re talking about

    e) you’re onto something good that no-one else knows about.

    I think that (e) is the least likely proposition.

  12. Stephen… I think the idea of the economy collapsing without government research is up there with communists (or terrorists) under the bed. At worst (assuming all the typical leftie assumptions) it would slow growth.

    How much government research was involved in sparking the industrial revolution? And I would be genuinely curious about how much government R&D existed in the eastern block countries.

    SJ… no need to be bitchy about this. My maths is fine.

    I am claiming 3% a month… and you claimed 3 times my amount. If you were getting 9% a month (word to the wise, 3 * 3 = 9) then you would have 690% over two years.

    The fact that I now withdraw some money bi-monthly is hardly relevant. Of course if you re-invest, then your annual returns will look better than a person who isn’t re-investing… but that’s kinda side-stepping the issue.

    No sweatheart deal. No broken kneecaps. The money is definitely there. I guess I’m being conned. Poor me. I’ve already made my money back and them some… so it’s a strange con. I guess I’ll just continued getting conned if that’s OK with you.

  13. “Stephen… I think the idea of the economy collapsing without government research is up there with communists (or terrorists) under the bed. At worst (assuming all the typical leftie assumptions) it would slow growth.”

    Who has advanced this idea, JH? It is obvious that if government research was the only source of productivity growth, stopping research would slow growth in the short run, and halt it in the long run, but would not cause the economy to collapse.

    And, as you say, the Industrial Revolution, unlike the Internet, was not primarily the product of public sector research.

    But if these are your strongest claims, there doesn’t seem to much in the original post that you would disagree with.

  14. jq: “Who has advanced this idea JH” (refering to the idea of the economy collapsing without government R&D)

    Stephen said: “it would cause it to go down in the long term as the economy collapsed taking philanthropy with it”

  15. My use of the word “collapse” was a bit ambigous. I didn’t mean that a lack of government research would reduce us to the point where there was no effective economy.

    However, I do believe that if Australia was to halt all government research, while other nations did not, we would be left with a shrinking economy which would severely impact on philanthropic funding for research.

    I’m not an economist, and I’d bow to Professor Q’s opinion here, but without government funded research many of our industries would quickly become uncompetitive. In some cases we could rely on buying in research from overseas, but in some cases that’s not really viable because overseas research does not address our local conditions. For example, how much research is done overseas on farming on saline soils. Not a lot, because most other nations with a lot of salt affected farmland are too poor to do much research. Without research in this area, which inevitably will have to be mostly government funded, huge areas of farmland will become unproductive, and I would think this would have to have a fairly significant affect on our economy.

    Whether such an effect would count as “collapse” is a different question, and I agree I should have chosen my words more carefully.

    BTW, I saw reference to a study comparing why Australia and Argentina, which in 1900 had quite similar ecomonies, went in such different directions since. The study concluded that the major difference was the scientific research in Australia which enabled us to increase the productivity of our agricultural, mining and manufacturing sectors, while Argentina largely failed to do this. I can’t speak of the validity of this study (can’t find it and probably wouldn’t be able to assess it’s accuracy anyway). However, what I can say with confidence is that if this research had not been done by the government most of it would not have been done by industry instead. The notion that industry will just rush in to fill the gap left behind when the government defunds science is in complete contradiction to experience.

  16. I think the fallacy in that last part is the idea that government and industry are the only two players. In a world – as it once was – with less government involvement there would be more truly private wealth, applied to the personal interests of its owners, and more independently resourced academia and charitable foundations (often endowed by the former group over time).

    In other words you would have more of the likes of Joseph Priestley, as well as a collection of prodigal sons wasting their substance (and who can pick the winners well enough to assess whether something is valuable research or another form of frittering on something crank? I heard of the engineer Ricardo before I ever heard of the economist of that name). None of this means that simple government withdrawal would be immediately and sufficiently replaced, but rather that the cumulative effect of governments has included this sort of pernicious crowding out (to misapply a phrase).

    For what it’s worth, I don’t suppose this research effort has much to do with the differing histories of Argentina and Australia, economic or otherwise.

  17. The fact that Argentina had a more socialist (and politically unstable) government also may have something to do with their relative decline vis-a-vis Australia. I would be fascinated to learn about the relative R&D spending (private and public) between Argentina and Australia.

    StephenL — talking about experience… experience is that the free market is capable of creating a vibrant and growing economy without the “help” (sic) of bureaucrats and tax-and-spend merchants handing out their pork to every corporation with a new idea or a powerful friend.

    Companies have learnt that corporate welfare is easier to sell if they rap it in the funky clothing of R&D. I guess the trick is working.

  18. >experience is that the free market is capable of creating a vibrant and growing economy without the “help� (sic) of bureaucrats and tax-and-spend merchants handing out their pork to every corporation with a new idea or a powerful friend.

    It has?

    Examples please.

  19. Ian, if you want an example of a perfectly free-market economy, you’re obviously more interested in rhetoric than real argument.

    If you want general examples of free markets creating more vibrant and growing economies than less free markets, please not the last two centuries. Note that government R&D spending is not the differentiating feature between Nth and Sth Korea… nor was it the differentiating feature between China and Hong Kong, or East and West Germany.

    It would take a brave (and, in my opinion, silly) person to attribute China’s recent economic growth to a boost in government R&D as opposed to the liberalisation of their economy.

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