The Cost and Benefits of R&D Spending

Posted by: Michael Mandel on July 05

In his latest post on Angry Bear, pgl seems to want to run a cost-benefit calculation on R&D spending:

Economists are guilty, however, of wanting to weigh the prospective benefits of R&D against their costs….here is the key question – how does the allocation of public funds weigh the opportunity cost of publicly funded R&D against the prospective benefits.

In the past, he’s also raised the question of whether there was too much private R&D spending

R&D in the internet, communications, and technology (ICT) sector as well as the life science (pharmaceutical and biotechnology) sector may have risen. But are the higher levels welfare enhancing?

Pgl’s suggestion to applying a cost-benefit model to R&D—especially to basic and early stage applied R&D—is simply unworkable. The reason is simple: R&D has a very high, very uncertain payoff. The benefits of a successful innovation—such as the Internet, or, say, a new method of cheaply converting sunlight into electricity, or a cure for lung cancer—go to everyone alive today, and to their descendants.

So if pgl wants to do cost-benefit calculations on R&D, he’s in the position of making some truly heroic calculations. What is the value of the Internet? What is the social discount rate (so we know how to value the benefits to our descendants)? And how do we even think about social risk aversion?

I think the argument is much simpler. We have an obligation to our children to continue funding science and technology—especially the early stage stuff—to the degree possible. We don’t want to apply cost-benefit calculations to R&D, just like we don’t want to apply them to education. This is the true seed corn for the future.



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Reader Comments

pgl

July 5, 2005 01:00 PM

It is true that a benefit v. cost approach is not easy and one could easily underestimate the expected benefits of an R&D project. But the concept of "to the degree possible" is very ambigious. In a $12 trillion per year economy, why not just commit $2 trillion a year to R&D or even more? But we are nowhere close to comitting 17% of our income to R&D. Why not if costs are not a relevant criteria?

Puzzled

July 5, 2005 01:15 PM

Mandel is a guy who said something like "Intel has good results.. so its possible that housing boom will smoothly shift to a tech boom without major jolt to the markets"

How ingenious ?

He chose to neglect IBM cutting back its forecasts etc.

I am afraid some serious students (liek me) who are visiting this blog for serious knowledge are going to be massively misinformed !! :-(

Mandell.. grow up buddy.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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