Kevin Drum writes about the role of government in fostering basic research:
It was the private sector that turned these inventions into multi-billion dollar businesses, but it was government that provided either the basic research, the initial market, or both. Acknowledging this isn’t an endorsement of socialism or tyranny or government run amok. It’s an acknowledgment of the reality of progress in the modern era. Obama was right to focus our attention on education, technology, and infrastructure in his State of the Union address, because that’s the seed corn that will provide long-term productivity growth for America and the world. But with apologies to Bill Clinton, if we’re really serious about out-innovating, out-educating, and out-building, this means accepting that the era of big government is far from over. When it comes to basic R&D and the infrastructure to exploit it, it’s only just just begun.
I’m kind of pessimistic about this. Basic science and R&D are risky long-term investments with substantial positive externalities. Consequently the private sector funds them at a sub-optimal rate, and the government can do a lot of good by ponying up the cash even if the research goals (“beat Russians to the Moon!”) are politicized, arbitrary, or even pointless. But for all the same reasons of externalities and spillovers that lead private firms to under-invest in basic research also apply to most governments. After all, they use the same technology in Canada as we have in the United States and the Bahamas didn’t get to be so much richer than China by having better science.
But for about 20-25 years after the end of World War II, the United States of America accounted for a gigantic share of world output. And if you restricted attention to the “free world,” our share was even bigger. So there wasn’t much possibility of free riding. What’s more, fostering catch-up growth in Japan and Western Europe was a key US foreign policy objective, so we were actually happy with free riding. The political economy of the near future looks a good deal different. The leading economies (US, EU, China) will each account for less than a third of total output, meaning most of the benefit of any basic research you fund will flow to foreigners. It’s a situation in which the best way to “win the future” may be to let someone else do the hard work.