25 August 2009

Economic Laws of Scientific Research

I am reading Terence Kealey's "The Economic Laws of Scientific Research" and finding it to be fairly interesting. He skimps a bit here and there on evidence, but one particular part caught my eye - The traditional economic claim regarding pure science and research is that industry won't invest in science because they cannot reap all the benefits of it. Therefore, government must step in.

However, Kealey claims that although existing science has aspects of a public good, it is expensive to understand and use. Industry finds secondary-mover research (working off of others' research) is much more profitable than first-mover (figuring out stuff on your own), but to access this science and exploit it, companies must hire scientists to digest the information. The best scientists aren't interested in just secondary research, however, and therefore extract a salary to fund their own primary research interests as well as keeping abreast of others' work. The companies must therefore invest heavily in their scientists' first-mover science to retain them as second-mover consultants.

Bottom Line:
It helps to understand the underlying market before pronouncing a market failure.

1 comment:

Eric said...

Since I am both a first and second mover in science, I find your statements mostly true. And interesting.

For example, the nation's nuclear weapons labs enticed scientists to work there by providing significant first mover funding. Now that funding is nearly gone and the first movers no longer come. Much of the needed second mover work is no longer done well at these labs. The required second mover work needs scientists smart enough to be first movers and these scientists are either leaving or not coming.

Companies across many industries, pharma and biotech for example,try to hedge the first and second mover dilemma.

If a company funds a first mover, the first mover technology may not move and the company loses money. If the company waits until the first mover technology is successful, the technology may be immediately sold to a competitor (We have been told that our Efficient Engines technology will have starting bids above $500,000,000 once we get beyond the next milestone. The bidding is expected to last 30 minutes.) If the competitor owns the technology and you don't, you lose.

If the government develops the technology, getting a license has huge transaction costs. The license is likely to be non-exclusive. So, you, the company, again lose.

If a university develops the technology and you can get an exclusive license, you still may have years and many millions of dollars of development to do in order to get a commercial product.

There are commercial risks everywhere.

One possible way around most of these risks is a privately financed 'Bell Labs for the 21st Century.'Such an entity would attract stellar first mover scientists and would support itself in the long term by licensing commercial products.