Chapter 14 of <>The Commercialisation of New Zealand
Keywords: Growth & Innovation;
Science interfaces with broad economic policy because it uses public resources and impacts on industrial policy. But even though the science community did not always help itself, Treasury’s approach was fundamentally anti-science. (Chapter 6) There is an instructive article by a Treasury official who wrote:
One leading United States researcher [Edward Mansfield ] in this field has estimated that of the total cost of product innovation in United States industry, 40% on average is incurred for tooling and in design and construction of manufacturing facilities and 15% for manufacturing and marketing start up. In some industries only a small percentage of significant advances is estimated to be a direct outgrowth of corporate [Research and Development] R&D (17% in the railroad industry and 17% in housing). Because R&D is part of the investment package which achieves change, attention should therefore be primarily focused on conditions in the economy which will achieve efficient decisions on investment rather than R&D alone.
The last sentence seriously misrepresents Mansfield’s position, whose policy position is almost exactly the opposite. Scientist David Penny described the slip as `an elementary form of deceit, using a quote from a recognised authority and then appending a different conclusion without indicating the end of the quote.' It is more likely the intention was that the last sentence was meant to be unconnected to the rest of the paragraph, and express the official’s own view. Even so, one is left with the unease that Treasury colleagues did not identify the error because they did not notice that an authoritative overseas view conflicted with their own.
Penny went on to raise an issue which at first seems to contradict the argument that Treasury was dominated by the Chicago economists’ analysis. (Chapter 6) Treasury analysis used a British economist, M.F.G.Scott, and neglected Americans Edward Dennison and Mansfield. Penny comments
The combined number of citations for 1983 and 1984 are Dennison 152, Mansfield 277, and Scott 16. …. What (this) does show is that New Zealand is basing its R&D policy on a minority view, and neglecting the conclusions of the established workers in the field.
Why did Treasury go to an unknown British source in favour of top level American ones? The most likely explanation is they could not find a better one consistent with their tight prior. While Chicago economists have made some contributions in the area, there does not seem to be a major work which tackles the issues that Scott and Mansfield were concerned about. The most obvious reason why the New Right economists seem not to have pursued R&D policy with any fervour is it may suggest their research program as an anomaly in their terms.
This inconsistency can be observed by considering the pile of articles supplied to the Beattie Working Party on Science and Technology by Treasury. It included a number of American ones whose author(s) noted had been made possible by funding from their National Science Foundation, or a similar funding body. This is not surprising for US government funds are used extensively to promote public interest economic and other research. Without them, American economics would be the poorer and less interesting.
However, given that Treasury was arguing to the Beattie Committee, and elsewhere, that there should be no publicly funding of such economic and other research in New Zealand, one was left with the puzzle as to their attitude to the US government funding public interest research. There is, of course, no inconsistency for a government committed to the public interest, nevertheless funding research whose results may be interpreted as being opposed to such public funding. If the New Zealand Treasury had been the US Treasury it would have refused to have funded the research on which the New Zealand Treasury depended. Treasury’s science policy was fraught with contradictions.
Towards the Commercialisation of Science
Scientists also had their inconsistencies, when it came to the economics of science policy. Rather than using the scientific approach to assess the role of science, the tendency has been to grab convenient, but hardly secure, arguments and research findings which justify policy prejudices. By the usual scientific standards there is not a convincing case that increased expenditure on science will inevitably increase economic output of an economy. There is a lot of fragmentary evidence which makes this a plausible hypothesis, subject to numerous caveats, but the details of any causal mechanism are unclear, with insufficient evidence to trace each step.
Some scientists claimed Robert Solow’s Nobel prize work proved that research and development caused economic growth. But Solow’s contribution to economics is much wider than the empirical estimation of the neoclassical production function. Moreover, while his research shows that economic growth can not be wholly explained by increases in the stock of capital and labour hours worked, the remainder Solow attributed to `technical change …. a shorthand expression for any kind of shift in the production function. Thus slowdowns, speedups, improvements in the education of the labour force, and all sorts of things will appear as “technical change”.’  [originals’s italics] Subsequent work by Dennison has refined knowledge of this residual, but nevertheless it remains a `coefficient of ignorance’.
In contrast to this careful work overseas, the New Zealand tendency has been to make wild claims of the efficacy of (apparently all) scientific research in promoting economic growth. A backlash was inevitable. If it is argued that research and development (R&D) plays a similar role in economic performance as does capital, why then should not R&D be treated the same as capital investment for policy purposes? In particular, government does not subsidise most investment, even though it acknowledges it generates economic progress. Should government treat R&D any differently? So when Treasury began the push for the commercialisation of R&D in the 1980s, led to a mutually incomprehensible dialogue between it officials and the scientific community.
The Characteristics of Science and R&D
Science does not always have a commercial purpose, and some is pursued for similar reasons to the arts. Its intellectual and spiritual contribution lift us beyond that which the material world offers. If, with very few exceptions, we accept the arts are valuable in their own right, if not commercially fundable. There are some areas in science like that too.
Second, sometimes the scientific research may not be a simple output, but a joint product, as when teachers feel compelled to research in order to keep up their teaching quality. The value of the research may be the improving the scientific literacy and competence of the students, rather than the research findings themselves.
Third, the client may not be able to pay for the work. Research on the environment may be most valued by yet unborn generations. Poverty research can hardly be funded by the destitute.
Fourth, the client may have little competence in judging the need for research. Officials and politicians bemoan the shortage of hard evidence when they are under the pressure of policy making, but are unable to make the simple connection that the shortage is a consequence of their failure to fund the research in the past. Officials can be unbelievably shortsighted. Some years ago I regularly saw the head of a departmental research unit about its funding a research program in what is still a key policy area. The director only ever wanted to discuss the problems which had bothered his minister that morning. No research program ever developed.
But even the farsighted may not predict all our future needs. Who a dozen years ago would have argued the possibility of a major epidemic as a justification for maintaining some of the research programs which are now fully committed to AIDS investigation? Some research competence has to be maintained for events which we are unable to foresee, just as a gene pool contains genes not in full use, but which may enable the species to adapt to an unexpected change in its environment.
Closely related to the above issues is that of political interference. Not all research is seen as politically sensitive, but particularly in the social, medical, and environmental sciences some can be acutely so. Ultimately science is about the possibility of creating revolutions in the way we think and what we do, something which politicians and officials are not as enthusiastic about. Faced with the threat of the new, most will attempt to repress its source. Yet a short time later they, or the next generation of politicians, will need and applaud the research findings.
In addition to the peculiarities of the demand for science, there are also some special features about the characteristics of the scientific process which means it is not simply analogous to the usual commercial processes.
Much of science is about uncertainty not risk. These terms have quite distinct meanings in economics but unfortunately they are often used interchangeably in the New Zealand science debate, even by some economists. Risk is when the event has a reasonably well defined probability distribution. Uncertainty applies to where it has not. The commercial world has evolved well tried procedures for investing in risky events. Uncertainty requires quite different strategies – minimum regret rules are common – which are not handled at all well in commerce. It is no accident that `acts of god’ are uninsurable.
The is the problem of appropriability, the degree to which benefits of a piece of work can be captured – or sufficiently captured – by the producer or creator. I have the right to sell the commodities I produce, a feature which is so common in a market society that it is noticed only in the breach. In creative areas it is not always possible to ensure that the creator is the beneficiary. There are intellectual property right laws designed to meet some cases, but the scientific method with its emphasis on open publication is inconsistent with the commercial approach. Moreover while ideas are not patentable, they can be immensely valuable to society. (I am paying no royalty for the use here of the concept of appropriability.) How then is society to ensure there is a sufficient supply of ideas? The commodity solution is simply not viable. Externalities may be a major feature of R&D.
We know little about how the benefits of R&D get transferred. Economists have so much trouble tracing the economic impact of R&D, is because it does not behave like ordinary investment. Studies which treat scientific knowledge like capital are very limited. The point is illustrated by Treasury imported economic research into its economic policy making, without any intermediation from a local research process, which it discouraged by withdrawing public funding and tightly controlling consultancy work. Their view seemed to have been that there was an economic theory independent of time, institution, culture, and location which could be easily adapted for our economic policy purposes. (They ended up with a theory which was peculiarly late twentieth century, raw capitalist, new right, American.) Policy makers do not usually have research skills and experience, and if the research establishment had not been so gutted by the funding cut back, there would now be a lot of work showing the inadequacy of the resulting policy recommendations. Very often the imported technology has been already obsolete and rejected by the majority of the profession. The conclusion from the economics experience, which will be no surprise to scientists, is that an effective `importation of technology for domestic applications’ strategy, be it by firm or nation, still requires a high degree of local scientific competence. It is not obvious how to maintain this without an on going research program.
An excellent example of the misunderstanding of an imported idea is the application of contestability for scientific research. The term has a well defined meaning in economics. Basically it refers to the situation where a market is under effective competitive threat from hit and run operators. However the term is frequently used loosely in public discussion without much reference to this rigorous notion. The idea that an ecology research group could be kept efficient by the threat of another research team appearing from nowhere, grabbing a few contracts, and then disappearing off to contest – say – the market for meteorological research, is absurd. It may be argued that it does not matter that the economist’s term is being abused. However, that research is not contestable (in the rigorous sense) tells us a lot as to why proposals for contestability (in the sloppy sense) are foolish.
A common feature of an industry which can make it noncontestable is capital specificity. That has both advantages – more specialised capital is likely to be more productive, and disadvantages – such capital can rarely be transferred profitably elsewhere. Thus new entrants to an industry face higher costs than incumbent firms, while the latter find it expensive to leave the industry. In such cases the conditions for contestability do not apply. For instance steel production is not particularly contestable; a steel mill cannot be easily converted into some other equally productive industrial plant. While the illustrations apply to physical capital, they apply equally to human capital and, in the case of research, to the scientific skills and experiences in the researchers. That human capital can be highly specific – an economist cannot easily convert into an ecologist, or vice versa.
The rigorous notion of contestability is exactly the wrong notion to apply to this research process. There may well be a case for regular assessments of each research unit’s performance, with the realistic possibility that if output and standards are too low or the research area is no longer a priority then the unit may be cut back or abandoned. There may be a case for some competition at the margin for research funds. But the logic does not point to contestability in research in any meaningful sense of the term.
Given all these complexities it is not surprising that commercialisation of R&D is not a comprehensive solution to the policy problem of sustaining the right level of progress of scientific and industrial knowledge. It is not even clear that R&D can be treated as a single entity. While some scientific endeavour can operate under commercial conditions – the development of pharmaceuticals is an obvious case – much cannot, including that which is described as `fundamental science’. But even dividing scientific endeavour into two categories does not answer the crucial question; how much should the government spend on non-commercial science activity?
The Science Reforms
The new structure had three characteristic features. There was a policy advising Ministry of Research Science and Technology (MRST, pronounced `morst’), a funding Foundation of Research Science and Technology (FRST, pronounced `forst’), and a number of state owned providing Crown Research Institutes (CRIs, sometimes pronounced `crises’) which are expected to be run on business lines. The research funds are `contestable’, which in this context means that private sector researchers can also seek the funds, although the vast majority have gone to publicly owned agencies (as would be expected if contestability did not really apply).
In principle the funding is for `public good research’, but in spite of a lot of effort it has proved difficult to define what that means. Obviously the intention is that which can be commercially funded is not to be publicly funded, but thereafter the notion becomes vague. Instructively the original scheme has had its rules changed, in order to fund `fundamental research’ and `excellence’ through the Marsden fund.
How to assess the success of the reforms? Unfortunately research has such a long time horizon, so half a decade out is too early, to be definitive. It can be reported that there has been considerable rationalization in establishments, presumably under the pressure to use capital efficiently (because CRIs have debt and equity servicing commitments). There have also been redundancies, sometimes involving scientists of considerable excellence, some of whom have been gratefully hired by foreign research institutions. The pattern of funding has changed. There is less funding of pastoral related research, for the old system was not responding quickly enough to the new diversified economic structure.
On the downside, few of the CRIs are making profits (perhaps inevitably given that for the majority their sole funder is FRST who are likely to use their monopsonistic position to squeeze profits). One CRI, the Institute of Social Research, went out of business before it went bankrupt. There is widespread unrest among the science community. A self responding sample of scientists surveyed by the New Zealand Association of Scientists in 1994 thought on the whole that there had been a deterioration in international regard for New Zealand science, a reduction in the ability to attract and retain good scientists, inferior access to facilities, support staff, and other working conditions as a result of the reforms. In summary, they thought there was a decline in good science and a rise in bad science.
Perhaps in a couple of decades we will have a better idea whether the reforms are successful or disastrous. As like as not, there will be further policy changes in the interim, which will make judgement about the earlier ones difficult. (Assessing the significance of a change is partly a question of judgement too. Is the Marsden fund a backdown or a progressive development?) One is struck however that they are not as evidently a disaster as the health reforms, although there are parallels.
One reason for the difference is that despite the upheavals, scientists have remained largely in control in MRST, FRST, and in the running of the CRIs, unlike the generic management takeover in the health reforms. One might argue that the science sector is somewhat more under scientist capture, than health is under medical capture. But is scientist capture worse than, say, Treasury capture?
Funding Accountability and Control
Therein lies a deeper worry. Today the government is much more able to control the disposition of research resources, and hence influence what is researched upon and even what conclusions are reached. In the old days funding disappeared into the maw of the Department of Scientific and Industrial Research, where mysterious decisions were made about on what it was to be spent. Now the allocation is more transparent. However that same accountability gives the government greater control over the direction of research, and effect reinforced by the pooling of university research into the FRST fund.
It is highly unlikely that this would lead to an episode like Lynsenkoism in the Soviet Union, where a nutty theory was pushed at the behest of Stalin, doing considerable damage to the scientific community and to Soviet agriculture. However if a sufficiently strong minister were to have some odd scientific theory he or she could promote it through the various direction, funding, and appointment mechanisms.
An indication of this possibility arises in a speech by the Minister of Science in 1996, which a newspaper summarized as `Avoid policy, Upton warns scientists’. He said `Scientists should think carefully before they enter [climate change] policy debate because the move from scientific analysis to policy advocacy can be fraught with risks. … I am not saying scientists should become political eunuchs. But they must understand that their policy views are of no greater importance than anyone else’s.’ Perhaps one should pay as much attention to taxi drivers, or even politicians and Treasury, on the response to greenhouse warming (if it exists). There is a, probably unintentional, menace in the minister’s speech.
Social scientists are even more exposed, just as the literary community struggled with the degree they should protest against changes to the State Literary Fund, since protesters were likely to be omitted for funding requests. Here is not the place to traverse here the story of political interference in social science research in New Zealand, a tale which goes back at least six decades. Nevertheless a government committed to, say, commercialist economic principles and antagonistic to alternative accounts of the economy now has a further means of controlling the economics profession and the direction of the development of economic analysis in New Zealand, through its research policy (in addition to the direct funding of consultancy, and its own substantial outlays on policy advice). The accountability of commercialism is not that of a liberal society.
 Mansfield (1981).
 Kerr (1985).
 Penny (1986).
 Penny (1986).
 Solow (1957).
 Dennison (1985), Balogh & Streeten (1963), Solow (1988).
 Bollard & Easton (1985).
 e.g. Strategic Consultative Group on Research (1994).
 Berridge et al (1995).
 Dominion, March 12, 1996.