The value of innovation

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the-value-of-innovation

Innovation is of course a good thing: so too is the science that leads to lovely new things to innovate with. We're all also well aware of the public goods arguments about science: because it's very difficult to profit from it directly we'll not have enough of it. Thus we need taxpayer support for science, so that we've got lots of lovely new things to innovate with and thus we all get richer. An example of the argument from Colin Blakemore:

PricewaterhouseCoopers estimates that every pound spent on research by the UK Arts and Humanities Research Council sees a rapid return of £10, and £15 to 20 in longer-term benefits........But it’s not just a love of intellectual pursuits that justifies the nearly £3 billion per annum the Government spends through the research councils and the additional £2 billion that is dispensed through the higher education funding councils. It’s the expectation that it will deliver benefits for UK plc — “outcomes" in Treasury-speak.

However, we do also have to add what we know from what I think is one of the great research papers of all time: Schumpeterian profits in the American Economy.

We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

In more detail, only 3% or so of the value created by new technologies goes to the entrepreneurs, 97% goes to the rest of us lucky people who get to use the new technology. In one way this bolsters the argument that science should be heavily funded: look what we all get from it!

In another, the picture is not so clear. For the science is a public good, as we've agreed, which is why it needs funding in the first place. But as the science is a public good (non-rivalrous and non-excludable) we don't actually care where it is done nor who funds it: only that someone does. Further, if all but some tiny amount of the value of the technologies created by the science comes from the use, not the making or manufacturing of them, then we don't really care where that making or manufacturing is done either. All we care about, rationally, is that we get to use the new gear. And the end result of that chain of reasoning is that there's no real reason why we should be insistent upon funding "British" science, or "British innovation" nor even "British manufacturing". As long as someone funds it, somewhere, why should we care?

If the Americans decide to tax themselves to fund such activities, why shouldn't we just be free riders on their efforts?