Funding the Future
The most important thing humanity can do for itself
Usually forgotten, government funding has often been crucial to initiating the transformative technological breakthroughs that shaped the modern world. Government funding of science, research, and development is currently woefully inadequate. To ensure our future, it is imperative that governments worldwide step up their investments in science.
Why Innovation Matters
Human achievement is a function of economic expansion, that expansion flows from productivity, or our ability to do more with less. But productivity, over the long term, is driven by technological and organizational advancements. Our well-being as a civilization, therefore, hinges on innovation and its diffusion.
Everything we depend on today, everything we take for granted, is bequeathed by millions of interrelated advancements across thousands of years of human history, each building upon the next. But the low-hanging fruit has been picked; invention is getting harder and is something akin to a Red Queen’s Race, where you must run ever faster to actually get somewhere. For example, today it takes 18 times as many engineers to fulfill a cycle of Moore’s law than it did in the 1970s.
It should come as no surprise that productivity/economic growth is slowing worldwide, especially in “developed” countries. This should be a wake-up call, but the warnings are thus far unheeded. The future of humanity depends on our ability to innovate-out of the challenges that confront us, but instead of running faster, our pace is slowing.
Not Nearly Enough
We needn’t just run, we need to sprint. We need more engineers, more scientists, more particle colliders, more telescopes, more supercomputers…etc. In sum, we need an abundant funding objective to realize our full potential. While we are generally wise to leave markets as free as possible, studies have consistently shown that markets and private industry are not capable of fulfilling this need.
Science is an area market failure reigns. For a variety of reasons, private industry is only able to capture a small portion of the social returns that their innovations produce. The private sector is motivated to conduct R&D only insofar as it can profit. Without the ability to capture those profits, private industry is unable to justify adequate investments in science.
This market failure leaves a gap between what we should invest in science, and what actually do. Estimates vary, but most studies suggest that the social returns are at least 3-4 times as large as the private returns. It’s safe to say that we are currently leaving most of humanity’s innovative capacity on the table. This is not acceptable.
We have no choice, where market failures occur, only the sovereign government is capable of correcting them. To achieve the optimal level of R&D investment, government policy should aim to bring private incentives in line with the social rate of return.
The Entrepreneriual State
For those who might instinctively recoil at this idea, remember that government investment has a notable track record for kick-starting transformative technologies. Take the iPhone, a product that revolutionized the global economy. While most attribute the iPhone to the genius of Apple engineers, state investment played a hidden, but important, role.
As Mariana Mazzucato writes in, The Entrepreneurial State, many technologies that culminated in the iPhone began with government-funded research:
The lithium battery can trace its roots to research at the Department of Energy and National Science Foundation in the late 1980s.
The microchip which processes data arose from an industry that was supported in its infancy by the US Defense Department and NASA in the 1960s.
The GPS that tracks your location and provides maps is born out of a fully government-funded satellite network built for national defense.
The capacitive touch screen that enables your fingers to interact with the phone arose from studies done at the Royal Radar Establishment, a British government agency for defense research.
Of course, the internet itself started as a Defense Department project under DARPA, seeking to decentralize computing in the event of nuclear war.
Even SIRI has roots in government research dollars. In 2000, DARPA tasked the Stanford Research Institute (SRI) to develop a ‘virtual office assistant’ for the military. SRI recognized the opportunity to use the technology as a smartphone application and commercialized it under the name “SIRI.”
Government, as the examples above illustrate, can invest where the private sector is unwilling, especially in those areas where the financial return is unclear. The question becomes, how can we ensure that taxpayer funds are used in the most effective ways possible?
Governments can induce the private sector to conduct more R&D though the use of patents. A patent grants a temporary monopoly over an idea, allowing a firm or individual the sole right of profit for a period of time. There are many issues with patents, which I attempted to address here, but patents alone do not solve the problem of suboptimal science financing.
R&D tax credits are another popular option. The government can subsidize research through the tax code and spur the private sector to invest more. Indeed, the data suggests that tax credits do induce more R&D spending, with the literature concluding that a 1 percent fall in the after-tax cost of R&D results in at least a 1 percent increase in R&D.
There are concerns that tax credits may be partially absorbed in the form of higher salaries for engineers and scientists. But if higher salaries convince more people to study in STEM fields, is this really a bad thing? Perhaps this is merely evidence of tax credits working as intended.
Direct grants are another tool in the toolkit. Research done by Moretti, Steinwender, and Van Reenen suggests that a 1 percent increase in publicly funded R&D generates a 0.4 percent “crowd-in” of private R&D. Unlike tax credits, however, grants are distributed through a bureaucratic selection process that may be subject to rent-seeking.
Lessons from DARPA
Historically, a disproportionate amount of innovation, from the internet to stealth aircraft, comes out of the Defense Advanced Research Projects Agency, or DARPA. This fact is all the more incredible as DARPA has a small staff of approximately 120 individuals and a budget of just $3.5 billion.
DARPA has an unusual ability to move mountains because the agency adheres religiously to a few basic principles: 1) Ambitious goals, 2) Temporary teams, 3) Independence from political interference, 4) Acceptance of failure 5) and a dedication to Pasteur’s Quadrant
DARPA’s ambitious goals attract the best and brightest from all walks of industry and academia, bringing together diverse talent that otherwise would not have the opportunity to collaborate. Research is quite clear on this, diverse teams with diverse knowledge are more effective than homogenous teams.
The transitory nature of those teams, typically 3-5 years, creates a powerful sense of urgency that accelerates progress. Indeed, Parkinson’s Law states that work expands to fill the time allotted to it. Ambitious goals with tight time constraints forces time efficiency.
DARPA’s independence and flat organizational structure enables the agency to select and cancel projects at will, free from forces that might distract from the mission. DARPA can maintain a portfolio of projects while remaining nimble, adaptive, and willing to fail.
Lastly, DARPA is dedicated to Pasteur’s Quadrant. Research funding is commonly divided by its perceived intent. Some funds go to “applied science,” or research aimed solely at practical uses, while others go toward “basic science” or the pure quest for fundamental understanding. But as Donald Stokes opines in his book, Pasteur’s Quadrant, this is a false dichotomy.
Rather than being opposed to one another, basic and applied sciences are orthogonal, and there exists a bridge between them. Known as Pasteur’s Quadrant, it is named after Louis Pasteur, a scientist who exemplified both the quest for understanding and how that knowledge can be used in practical application.
In an era of growing challenges, sovereign entities should begin stepping up investments into transformative technology for the betterment of humankind. To do this in the most effective way possible, I propose a balanced approach.
First, as we discussed in detail here, patents would be transformed from a pure, albeit temporary monopoly, to a partially publically owned status though Harberger taxation. This will reduce incentives for patent trolls and make the market for patents more liquid, accelerating technological diffusion.
Second, the government would offer generous (>25 percent), broad-based, tax credits for R&D. Crucially, these tax credits would be at least partially refundable. That is, even if a firm didn’t make a profit in a given year, it would still receive the benefit of the credit. The goal would be to induce greater investment into R&D, and to provide startups with a source of funding through the “valley of death” that kills most startups before they have an opportunity to prove themselves.
Third, I propose the establishment of the Human Advancement Research Projects Agency, or HARPA. HARPA would be tasked with advancing breakthrough solutions for the most pressing problems, from defeating cancer, to human life extension, to new energy solutions, to hypersonic travel.
It would do so using three approaches:
Selectively buying out patents that are in the public interest
Targeted grants and prize incentives for transformative breakthroughs.
Direct DARPA-like initiatives led by temporary teams designed to overcome obstacles for human development.
This balanced approach would seek to at least triple, if not quadruple total R&D funding, from the current ~3 percent, to 9-12 percent of GDP. Such an expansion in funding would have a profoundly positive impact on humanity.
With armies of scientists developing breakthrough cures for disease, new materials, more efficient forms of propulsion…etc. economic growth and global productivity would surge. Instead of timidly stumbling, humanity would sprint bravely forward into the 22nd century.