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Saturday, November 19, 2011

How Much Should Society Invest In X-Prizes

  Some time ago I quoted from a review of Sex, Science and Profits by Terence Kealey, I have been reading it and thoroughly reccommend it though not agreeing with the conclusions that patents should be abolished and that state funding of science never works. It is a history of human progress with market freedom in the role of hero and government parasitism as villain.

  He mentions and disagrees with, Edwin Mansfield, who says
"that "primary" producers will underinvest in research because their profits are stolen by "secondary" commercial customers. So, for example, when a seed-breeder (the primary producer) develops a new seed, much of the profit from the new seed is extracted by the farmers (the secondary commercial customers) who plant it. Indeed, surveys have shown that secondary commercial customers can benefit about three times more from innovations than do the primary producers."
   I have previously written on how the patent system does not and probably cannot protect intellectual property rights as well as traditional rights to land, labour and capital are protected by the law though I think that in the long term technological innovators add far more to human wealth than the holders of traditional property rights  (cavemen owned far more land per capita than us but were poorer because they didn't have the technology. However is puts a fixed price on the value of intellectual property.

   I believe that it is desirable to protect the rights of wealth creators to much of the wealth they create, not for reasons of justice but because it provides the incentive to do so" I also believe that if inventors were rewarded better than they are now they would be not far from proportionally more productive - this is a point with which Professor Kealey seems to disagree.

  That being the case ideally inventors should be getting something close to 4 times the return they do now. I have not been able to find figures for what patent holders worldwide receive and possibly such figures cannot exist because some of their profit comes from licensing and some from their own production. However I do have figures for the amount of world GNP devoted to research and development. It varies between 4% for Israel, 1.7% for the UK and fractions of a % for undeveloped countries but in total comes to $1 trillion out of world GNP of $75 trillion ie 1.33%. I assume that the amount spent on R&D is not greater than the profits on doing it.

  In which case, to bring the return on intellectual property in technological innovation up to what experience suggests is optimum for other factors of production, society should be rewarding researchers and developers with 4% of world GNP (1.33% X 3).

   The problem with doing so, as Professor Kealey says, is that the effect of government funding of science has been, according to an OECD report (and they are unlikely to be biased against government), negative. Government tends to fund the established and politically connected and, as with catastrophic warming, subvert science to the results government wants. Rewarding the R&D community this way would not have the desired effect.

   Professor Kealy challenges "that no one - no one - has shown that the government funding of science stimulates economic growth" and I think I can match that challenge.

   Grants don't do it but prizes do. I do not think anybody could dispute that the Longitude Prize stimulated John Harrison to produce the marine chronometer, leading directly to the discovert of Australia and New Zealand (or that any but the most refined could think this a bad thing). That Prize is one of a substantial list of such prizes which have repeatedly achieved remarkable success. See here ("undue stimulus to competition") and here and here and here and here and here and here (Archimedes, used in the book as an example of free markets is used by me as an example of government prizes).

   In which case, if prizes really are an effective stimulus to technology the optimum would be to put 4% of world GNP ($3 trillion worldwide, £60 billion in the UK) into such prizes even without reducing patents. Arguably proportionately more in wealthy countries since our proportion of GNP invested in T&D is already higher.

   I have previously suggested 1% as a target and being inherently cautious in political criticism (really I am it is just that the idiocies of those in charge are so glaring) I would now only raise that total initially to 2%. Let's see how 2% goes. But I would certainly be confident that 2% is not in any way excessive and would more than pay for itself by increasing Britain's GNP by more than 2%, priobably considerablt more.

    I previously pointed out how X-Prizes, when they work, do so at costs 33-100 times less than government grants (when they don't work they cost zero because no prize is awarded). I have also written of the Harvard paper that said prizewinners normally recoup only 1/3rd of their costs through the prize. This suggests that the benefit of putting up £60 billion annually would be between £180 billion in immediate investment and £6 trillion in foregone government wastefulness. Since the entire economy is £1.5 trillion I would treat the last figure as purely theoretical but the effect looks like a game changer.

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