1.3.5 Investments in research and development by the government

In classical theory, for instance, in the work of David Ricardo, we sometimes find some (few) annotations about technological progress and the impact of technological impact on wages. However, there is no explanation of how technological progress happens nor does technological progress change his prognostics. Growth is only possible, in the theory of David Ricardo, through a quantitative increase in capital.

This theory and all the similar ones are so far away from reality that they play no role in public debate, although we can read on a daily basis that we are living in a "capitalist" society. It is to assume that the people who use this term mean a market economy, but it is as well possible, that the have no clue what they are talking about.

The term capital means actually nothing. While it is unclear what part of the national income depends on know how and what part on "capital" the term is useless, because it remains unclear whether the power is in the know how or in the "capital", whatever that is.

It is obvious that depending on the answer given to the question whether the income depends on know-how or "capital", the measures to be taken to change the distribution of income are completely different.

We obviously don't find in Jean-Baptiste Say an in-depth discussion about the education system, the role of didactic, the unequal access to the education system etc. Differences in know-how depend, following Jean-Baptiste Say, on talents, what he defines as a kind of wealth.

From a today's perspective that is nothing extraordinary, but in comparison to David Ricardo, it is a big step forward..

Le salaire des ouvriers de manufactures est souvent plus fort que celui des ouvriers des champs ; mais il est sujet à des vicissitudes fâcheuses. Une guerre, une loi prohibitive, en faisant cesser tout à coup certaines demandes, plongent dans la détresse les ouvriers qui étaient occupés à les satisfaire. Un simple changement de mode devient une fatalité pour des classes entières. Les cordons de souliers substitués aux boucles plongèrent dans la désolation les villes de Sheffield et de Birmingham 1. Les moindres variations dans le prix de la main-d'oeuvre la plus commune ont de tout temps été regardées avec raison comme de très grands malheurs. En effet, dans un rang un peu supérieur en richesse et en talents (qui sont une espèce de richesse), une baisse dans le taux des profits oblige à des retranchements dans les dépenses, ou tout au plus entraîne la dissipation d'une partie des capitaux que ces classes ont ordinairement à leur disposition. Mais dans la classe dont le revenu est de niveau avec le rigoureux nécessaire, une diminution de revenu est un arrêt de mort, sinon pour l'ouvrier même, au moins pour une partie de sa famille.

The wage of a workman in a factory is very often, higher than the wage of an agricultural labourer, but exposed to misfortunes. A war, a prohibitive law, that eliminates suddenly the demand, leads to desperation those who earn a living satisfying it. A change of fashion alone can have fatal consequences for an entire class. The substitution of shoelaces for leather by buckles submerged in desperation the cities of Sheffield and Birmingham. A change in the the price of the labour force, as small as it may be, was always considered as a big misfortune. A a level a little bit higher in fortune and talent (that is kind of fortune), a diminution of the profit rate makes a reduction of the expenditures necessary or at most to a reduction of capital possessed generally by theses classes. But where the incomes don't exceed the absolutely necessary a further diminution means death. Perhaps not for the workman himself, but for his family.

Jean-Baptiste Say, Trait‚ d'économie politique II, Chapitre VII, Des revenus industriels

From a methodological point of view, Jean-Baptiste Say is very similar to Adam Smith and very different from David Ricardo. There is no modelling in the writings of Jean-Baptiste Say and Adam Smith. That can lead, as in the case of Adam Smith, to contradictions, but allows to the reality in its complexity. It is the change of fashion, in the paragraph above, that leads to destruction of capital.

Similar to David Ricardo, he assumes that every time the wage is above subsistence level, the population will increase, although he doesn't draw, contrary to David Ricardo, any further conclusions about wages.

Il est des maux qui résultent de la nature de l'homme et des choses. L'excès de la population par-dessus les moyens de subsistance est de ce nombre. Ce mal, toute proportion gardée, n'est pas plus considérable dans une société civilisée que chez les peuplades sauvages. En accuser l'état social est une injustice ; se flatter qu'on pourra s'en affranchir est une illusion ; travailler à l'atténuer est une noble occupation : mais il ne faut pas chercher des remèdes qui ne remédieraient à rien ou qui aurait des inconvénients pires que le mal.

There are sufferings which derives directly from the nature of man and things. The growth of the population beyond the possibilities of its maintanance belongs to this type. This misfortune exists more or less to the same extent in civilised societies as in savage tribe. To blame the social order for it, is unfair. To imagine that it could be possible to get rid of it, is an illusion. It is a noble endeavour striving to alleviate this misfortune. But one should not look for a remedy that will not cure anything and whose secundary effects are worse than the misfortune itself.

Jean-Baptiste Say, Trait‚ d'‚conomie politique II, Chapitre VII, Des revenus industriels

We disregard the fact that the assumptions are completely wrong. Wealthy societies shrink, but that's not the point. The point is that we have a strange kind of situation. At one side he assumes that the vast majority of the people will always live in misery, at the other side, he considers economic growth as something positive. However, if economic growth only leads to a still greater number of people living in misery, it is hard to see what benefit can be possibly obtained by growth.

We find that mystery in any classic author. We don't expect from economists said they tell us enlightening things about the sense of life, that's another branch of human thinking, for instance, philosophy. They only have to tell us how to make a cake as big as possible with given resources. However, arguing in favour of a system that only guarantees misery for a steady growing amount of people is actually mad.

It is generally assumed that economic growth is needed because labour becomes more and more productive. If the same GDP can be produced with less and less people in order to employ the same amount of people the GDP must increase.

In some countries, the unions fought for another solution of the problem. If less and less labour is needed to produce the same GDP, an alternative would be to reduce the weekly working hours. There are several problems with this logic. The first problem is that people prefer money to more leisure time. The second problem is that without a reduction in wages, proportional to the reduction of the working hours competing countries can produce cheaper. The logic can therefore only work, if a) all unions everywhere in the world, provided they exist in any country, would fight for a reduction of the working hour or b) the wages are reduced proportionally. Experience shows that even in branches very wages are very high and a reduction of wages is possible without lowering the living standard; union don't fight for that solution. (What the actual fight for is a reduction of working hours without a proportional decrease in wages. This solution is only possible when realised at a global level, something not very plausible to happen.)

We don't say that Jean-Baptiste Say said something very important related to the production of know-how and the conversion of know-how into products. However he realised, contrary to David Ricardo and all the neoclassical authors, with exception of Alfred Marshall (!!), that know how is a crucial production factor.

To put it in a more "abstract" way. Jean-Baptiste Say in general conceived market economies as dynamic systems and not as machines that work without any human interference.

Hors les cas extraordinaires, la sagesse conseille peut-être d'employer aux essais industriels, non les capitaux réservés pour une production éprouvée, mais les revenus que chacun peut, sans altérer sa fortune, dépenser selon sa fantaisie. Je ne crois pas qu'il y ait un plus noble emploi de la richesse et des talents. Un citoyen riche et philanthrope peut ainsi faire à la classe industrieuse et à celle qui consomme, c'est-à-dire au monde entier, des présents qui surpassent de beaucoup la valeur de ce qu'il donne, et même de sa fortune, quelque grande qu'elle soit. Qu'on calcule, si l'on peut, ce qu'a valu aux nations l'inventeur inconnu de la charrue. Un gouvernement éclairé sur ses devoirs, et qui dispose de ressources vastes, ne laisse pas aux particuliers toute la gloire des découvertes industrielles. Les dépenses que causent les essais, quand le gouvernement les fait, ne sont pas prises sur les capitaux de la nation, mais sur ses revenus, puisque les impôts ne sont, ou du moins ne devraient jamais être levés que sur les revenus. La portion des revenus qui, par cette voie, se dissipe en expériences, est peu sensible, parce qu'elle est répartie sur un grand nombre de contribuables ; et les avantages qui résultent des succès étant des avantages généraux, il n'est pas contraire à l'équité que les sacrifices au prix desquels on les a obtenus soient supportés par tout le monde.

Put aside some special cases, prudence suggests to never use capital employed in a profitable way in the economy an to use only the incomes that anybody can use as he wants without diminishing his capital. I don't think that there is a better use for the wealth and the talent. A rich and philantropic citizen can offer this way to the working class as well as to the consuming class, in other words to the whole society something that exceeds greatly the value of what he gives, perhaps even the value of his fortune as big as this may be. If possible one can imagine the gift give to humanity by the inventor of the plough. A responsible government which disposes of great incomes will not allow individuals to claim all the glory of industrial inventions. The expenditures of a government in experiments don't diminish the capital of a nation, because the taxes, at least it should be like that, are never imposed on the fortunes, but only on the fortunes. The part of the income that vanishs this way is almost imperceptible, because it is distributed over many taxpayers and if the benefit is big in case of success it is not unacceptable that the sacrifice by which it is obtained is paid by all.

Jean-Baptiste Say, Trait d'économie politique, Livre I, Chapitre VI, Des opérations communes à toutes les industries

His argument is not very precise but is actually universally accepted in most industrialised countries. In all industrialised countries research and development, especially related to basic research, is financed by the government, in other words by the taxpayer.

This can be explained by the fact that investments in research and development are kind of a lottery but with one important difference. The tickets are extremely expensive and in case that they reveal worthless, the player goes bankrupt. For the whole group of the lottery player, the result is balanced, but not for the single player. Therefore, he won't play this game if he ruins himself if the ticket is worthless.

Research and development can therefore only be financed by an entity that profits from any kind of primary and secondary effects of a successful investment in research and development, in other words from investments in research and development that leads to concrete products.

Primary effects are for instance, even in the case that research and investment doesn't lead to concrete products and improves the qualification of the scientists. If they find therefore a better job, they will pay higher taxes and that benefits to the whole society. A company only invests in the qualification of their employee if this is needed for their job and if it can be more or less sure that they will stay there for a while.

The benefit for the society from successful research and development is obvious. The TCP/IP protocol is the result of governmentally financed research and development. The income generated by technology, programmes, services based on this protocol exceeds obviously, very obviously, in this case, the investment.

Some investments in research and development are only profitable if we add the secondary effects. It is well possible that successful investment in research and development wouldn't be profitable for the single investing company, but adding the secondary effects, more jobs, less spending in social transfer due to unemployment, more tax revenues, it is profitable.

We can consider investments as well using the same logic we apply to insurances. Insurance reduces a risk that can't be borne by a single person to an average risk. The government is big enough to insure himself against bad investments. Most of the investments in research and development leads nowhere, but very few are enough, to compensate the risk. View from this perspective the government is kind of venture capitalist.

Nevertheless, when it comes to governmental spending in research and development we find ourselves between Scylla and Charybdis, see as well governmental activities. It is obvious that a system that is not controlled by the objective, clear and transparent mechanism of the market will end up on the wrong path.

Governmental expenditures in research and development are not controlled by prices; underperformer will not be eliminated and there is, therefore, no steering mechanism allowing the optimal allocation of resources. Resources are the game point of pressure groups, lobbies, intrigues, sympathies/antipathies, personal connections etc. A rational distribution of resources is not only difficult but not even wanted.

It is obvious that any branch of the scientific community will try to defend their interests. Molecular biologists, as well as physicist or chemists etc., will find many arguments why more investment in molecular biology, physics or chemistry is needed. All of them will try to influence the mass media, political parties, public entities. This is much more important than logical arguments.

We will discuss that topic again in the chapters about Friedrich Hayek and Milton Friedman. The problems we find in governmental financing of research and development, the lack of steering mechanism, we find it as well in public education, court ruling, defence, public health care and in any kind of public services that for different reasons are not controlled by the market mechanisms.

That's the reason why Milton Friedman is against governmental financing of higher education, Should Higher Education Be Subsidised?, social welfare, Welfare State Dynamics and almost any kind of governmental intervention. The logic of the neoliberals as Milton Friedman is as simple as unrealistic: Everything that need to be decided can be decided by the market and what cannot be decided by the market, shouldn't be decided at all.

The basic message is that governmental activities can't be controlled and if they can't be controlled, the resources will be used for the personal benefit or the benefit of certain groups. The control of competition, the pillar of market economies, is missing. That's what Hayek calls "The Road to Serfdom".

Following this logic until the very end we get to the Anarcho-Capitalist, a society purely organised by agreements between individuals. We will discuss the topic in the chapter about Milton Friedman. The problem with this kind of thinking is that problems that can be solved by agreements between individuals without any kind of coercion are limited. Therefore, an alternative to the complete retirement of governments is needed.

Transparency can have a similar impact as the market mechanisms and there are several economic models that allow for financing projects aiming to promote transparency. Therefore, it is to be expected that in the long run we see more and more projects of this kind. The error of the neoliberals is the assumptions that the only way to control the economy are the market mechanisms. That's not true. See as well preliminaries.

Some problems of scientific research centres are obvious. The career of scientists depends exclusively on publication in scientific journals. Politics on the other side expects from investment in research and development marketable products and innovations. It is obvious that this is not going to work. If the academic career of a scientist depends on publications in scientific journals, he will produce papers for scientific journals.He doesn't care if the result of his research is relevant or irrelevant.

He is not even interested in a cooperation with private companies who eventually can make use of the result of his research because this has no impact on his academic career.

Without a close cooperation between research institutes and private companies, the transformation of scientific research into marketable products is difficult because scientists, in general, are not entrepreneurs.

Concerning economics, most of the "scientific" papers are useless, nobody cares about, although the academic career of an economist depends on these never discussed discussion papers.

If politics wants a bigger impact on public financed research and development, it must change the rules of the game and give the right incentives.

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1.3.5 Investments in research and development by the government

Jean Baptiste Say is the only classical author who mentions the importance of research and develop-ment.