Does R&D Drive Economic Growth?

The Mythology of Innovation

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Both parties champion R&D spending as an engine of economic growth. But the data doesn't give us such a clear picture; many forms of R&D yield returns of near zero, according to a study from the Bureau of Economic Analysis. Our focus on R&D masks the fact that the broader mechanisms of what drives economic growth remain poorly understood. Photo by Dreamstime.

October 29, 2012 | Roger Pielke Jr

It is a claim that you hear often in discussions of the role of research and development in the economy: “Federal investments in R&D have fueled half of the nation’s economic growth since World War II.” This particular claim appeared in a recent Washington Post op-ed co-authored by a member of the US Congress and the chief executive of the American Association for the Advancement of Science. It would be remarkable if true. Unfortunately, it is not.

Let’s take a look at some numbers to illustrate what follows from the claim. From 1953 to 2007 (the period of available data from the AAAS) the United States invested a total of $3.9 trillion in federal R&D. Over the same period US GDP grew from about $2.4 trillion to $13.9 trillion, representing an annual growth rate of 3.3% (data in 2007$ and available here in XLS). If we attribute half of that growth to federal R&D, or 1.65% of that 3.3% annual GDP growth rate, then that would imply a 2007 GDP of about $6 trillion in the absence of such federal investments. In other words, from 1953 to 2007 the economy grew by a cumulative $153 trillion more than it would have otherwise, representing an implausibly staggering 40 to 1 return on the federal R&D investment.

Unfortunately, such claims and the economics that follow are part of an overly simplistic story that we tell ourselves over and over. In 2007, Leo Sveikauskas of the Bureau of Economic Analysis surveyed the economy-wide returns on R&D (here in PDF) and found far more sober results: “Returns to many forms of publicly financed R&D are near zero . . . Many elements of university and government research have very low returns, overwhelmingly contribute to economic growth only indirectly, if at all, and do not belong in investment.” The exceptions that he cites include federal R&D in health, agriculture and defense.

Many would reject the idea that the contributions to economic growth of federal R&D are “close to zero” as being as improbable as R&D accounting for half of all economic growth. Whatever the actual rate-of-return, the existence of such diverse, even incommensurate, claims illustrates that the role of federal R&D in economic growth is very poorly understood. More fundamentally, the mistaken focus on federal R&D as a sort of control knob that might be used to modulate economic growth masks the fact that the broader mechanisms of economic growth remain poorly understood.

Making discussion of these issues more difficult is a persistent post-World War II mythology that has married the political self-interests of the federal science lobby with a convenient misreading of economic theory.

As has been well documented, the publication of the 1945 report Science - The Endless Frontier marked a sea change in how science was viewed by government and the public. “Basic research” became accepted as an appropriate category of federal investment, and subsequently R&D budgets increased by more than a factor of 10 over the next thirty years.

The timing of the publication of Science - The Endless Frontier occurred after Joseph Schumpeter advanced his thesis of how “creative destruction” in the economy leads to economic growth and before Robert Solow formalized a model of economic growth that attributed about half of all growth to a concept that he called “technical change.” Both perspectives were readily adapted (and, arguably, modified substantially) by the science and technology policy community to elevate the importance of basic research as the linchpin of economic growth.

An illustration of this adaptation can be found in an influential 2007 report on science policy by the US National Academy of Sciences, titled Rising Above the Gathering Storm, which repeated justifications for the government support of basic research that had been often repeated over a half-century. The report explained:

Early in the 20th century, Joseph Schumpeter argued that innovation was the most important feature of the capitalist economy. Starting in the 1950s, Robert Solow and others developed methods of accounting for the sources of growth, leading to the observation that technologic change is responsible for over half the observed growth in labor productivity and national income.

While such observations are sometimes accompanied by qualifications (the NRC report includes some deep in the report), inevitably the resulting policy recommendations focus narrowly on more government support for R&D, and especially university-based basic research.

Ironically, the frequent invocation of both Schumpeter and Solow in the context justifying government support for basic research finds little support in what Schumpeter and Solow actually argued.

Schumpeter described the roles of invention, innovation and diffusion in the economy, concepts which others adapted to a linear model of innovation (see, e.g., Godin here in PDF for an in-depth treatment of this history). But Schumpeter explicated that he rejected any such linear model:

It should be noticed at once that that concept [of innovation] is not synonymous with “invention”. . . It is entirely immaterial whether an innovation implies scientific novelty or not. Although most innovations can be traced to some conquest in realm of either theoretical or practical knowledge, there are many which cannot. Innovation is possible without anything we should identify as invention and invention does not necessarily induce innovation, but produces of itself no economically relevant effect at all  (Schumpeter 1947).

Similarly, Solow used the term “technical change” to refer to any change in the economics of production, and not as a specific reference to “technology” as conventionally understood.  Solow explained in 1957:

I am using the phrase ‘technical change’ as a shorthand expression for any kind of shift in the production function. Thus slowdowns, speedups, improvements in the education of the labor force, and all sorts of things will appear as ‘technical change’ (Solow 1957).

Writing in Slate, Matthew Ygelsias said of claims that “technology” causes economic growth, “it represents a statistical discrepency, not an inquiry into independently identifiable properties of technological growth. It's like Molière's doctors explaining that opium puts people to sleep because of its virtus dormitiva.”

The integration of post-war science policy with a misinterpretation of neo-classical economic theory led to the creation of a mythology of innovation that persists today. Benoît Godin, the innovation scholar at the Institut National de la Recherche Scientifique in Montreal, explains (here in PDF) that this mythology has practical consequences:

The problem is that the academic lobby has successfully claimed a monopoly on the creation of new knowledge, and that policy-makers have been persuaded to confuse the necessary with the sufficient condition that investment in basic research would by itself necessarily lead to successful applications. Be that as it may, the framework fed policy analyses by way of taxonomies and classifications of research and, above all, it was the framework most others compared to.

So in our public debates, rather than examining innovation policies and the complexities of securing economic growth, our discussions typically devolve into simplistic appeals for more federal R&D, such as found in the Washington Post op-ed that I opened with above.

The enduring popularity of investments in federal R&D among politicians of both parties and US intellectuals has helped to reinforce the narrowness of this conversation. Innovation, and thus economic growth, are related to complex issues well beyond R&D like immigration, inequality, education, property rights, health care and beyond. A narrow discussion also helps to cover up the fact that neither Republicans nor Democrats (including both 2012 presidential candidates) has articulated a coherent theory of economic growth. This should not come as a surprise because for decades academics have paid little attention to the subject either -- it is time that changed.


Comments

  • Very good point. Frank to the ignorance of economics.

    By Xiaohua Zong on 2013 02 07

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  • It seems to me it ought to be relatively easy to conduct a lagged time series analysis to determine if there is at least a correlation between R&D expenditures and GDP; if not, we can conclude that there’s no causal relationship. If there is, we can investigate whether causality is the reason for the correlation. Has anyone conducted such an analysis?

    By E Kimball on 2013 03 15

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  • We know for certain that major areas of our economy would not have existed without innovation. We know that countries that do not innovate slip into stagnation. All our competitor countries understand this and are dramatically increasing their R&D spending while we fall behind and watch the center of scientific innovation shift to other countries.

    This author’s views are dangerously short-sighted, and this article presents no facts or believable arguments.  He wants to see an immediate, traceable effect of each R&D dollar on innovation. But it is impossible predict which area of R&D spending will bear fruit and many will not, or will blossom in the distant future. But for certain without R&D spending, innovation will chug to a halt. And the days when you could innovate from your garage are largely over since the low-hanging fruit have been picked. And most of those “garage innovations” were inspired by major investments into R&D anyway.

    By Innovator on 2013 03 16

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  • I agree with Innovator on 3/16. Assertions about the economic benefits of investments in R & D should be examined critically, especially if their source is self serving. But, Pielke’s assertions are not convincing and as Innvator states, no real facts are presented. Innovations like magnetic resonance imaging, GPS and the Internet grew out of basic research decades before and could not be anticipated. Without the discovery/invention of the laser ca. 1960, we would not have the fiber optics comminication networks of today, which have been estimated (by the American Physical Society)  to account for ~$1 Trillion annually in broad economic impact. There are numerous other examples of the economic/military impact of basic R & D.

    By Winthrop Smith on 2013 03 16

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  • I’m on Innovator’s side, too.  (Zong may be playing with us with his inscrutable answer.) 

    Pielke is right that complex issues affect tech-based growth, such as immigration and IP.  He is increasingly wrong that scholars “have paid little attention to the subject”; see for example J Policy Analysis and Management v 31 no 3 p 598 (2012) for a pointer into the Science of Science Policy initiative.

    Pielke’s shock that the integrated ROI for R&D since 1953 is “an implausibly staggering 40 to 1” betrays a profound lack of appreciation for the exponential function.

    By Alan Hurd on 2013 03 16

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  • This article mis-understands the importance (indeed outsized importance) of rare events, which cannot be easily detected in normal statistical correlation studies. Yet these rare events are what TRUELY drives economic growth. Of course most research and development lead to nothing. But that’s not the point. The point is that all you need is ONE transformative discovery. Consider the case of the transistor. Since it’s discovery, how many trillions of dollars of economic growth occurred? In fact, the invention of the transistor and computers lead to a real shift in economic activity itself. Improvements in efficiency occurred in so many sectors, you cannot really even properly count the GDP dollars it produced.

    Another example is the invention of the steam engine. This lead to a quantum leap in transportation and productivity in many industries. This is what we really mean by economic growth. These events are clear to historians, but somehow escapes the economists.

    The point is that these events are so rare, and so unpredictable, one cannot even put a price to it. Imagine if these inventors are paid by a percentage of value-created, as many of the wall-street parasites are being paid, the scientists would be paid in trillions. That pays for all the R&D cost and much much more. Of course, scientists themselves will tell you that these serendipitous events cannot be traced to a single act at any moment in time. Many scientists contributed to the transistor, the final research paper has just a few names, but that builds on so much of previous hardwork.

    In addition, many discoveries are made possible by other discoveries which are seemingly unrelated. Maybe better way is that most discoveries and inventions are emergent phenomena which occurs when human knowledge reaches a critical point of depth and breath. It is conceivable that improvements in aging research will depend on some physicist working on photon counting, for example.

    It is precisely these rare events that private enterprises cannot count on. They have to report results every 3 months. Also, if you think about it, we over pay for short term results frequently (CEO pay for example), and don’t understand how to pay for truly longterm results. Yet, longterm results are what’s truly valuable.

    By Sean Sun on 2013 03 18

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  • In addition to earlier, salient points on the short-sighted conclusions of the article, the citations included in the article to argue his point that R&D is a waste of money have excepted research in health, ag and defense, which is a huge percentage of federally-funded research. These investments, primarily given to highly-competitive grants at major universities, fund training of our nations scientists and do yield tangible results. Look at where our major tech hubs are located: Boston, San Francisco, Austin, where major universities are putting these funds to good use, collaborating with private-sector tech companies, and solving our worlds problems.

    Of course you can always say that returns on investments in SOME forms of R&D are near zero; that’s much of what makes it research. Sometimes an idea does not work, or a theory is proven incorrect. This is why it is unfeasible for many areas of private-sector technology companies to make large investments that, decades later, often lead to dead-end projects.

    By Roger on 2013 03 18

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  • Speaking of self-interest, appears to be alive and well in comments.

    Blindly believing that R&D spending—like anything else, leads to an outcome is precisely what those professionals should not be doing. The problem with R&D is that the data & publications are sourced from very conflicted institutions. There has been a considerable debate - along with investigation, on the issue of bias within academia.

    The question for me is less whether R&D spend benefits, but rather whom? The data on this is quite varied, but generally clear that most of the benefits are flowing to the elite, industry mkt leaders, a few clusters like SV & Cambridge, with many state universities serving primarily out of state interests.

    Here in NM, the state economy benefits from the direct jobs, taxes, etc., but the state has never experienced one significant business spin off regionally, despite one of the highest ratios of R&D spend in the world. As the author correctly states, the contributing factors for growth in the economy are many, highly complex, extending far beyond R&D.

    However, having just completed a report on life science, I can share that I found dozens of highly credible papers on the trend of lower productivity in R&D, with culture cited often, misalignment of interests, and other factors.

    In addition, very well documented work has been performed in the private sector on the diminishing returns in large mature companies, especially in monopolies, which any aware consumer of information on the topic should be aware of.

    That so many are so willing to blindly accept what is an enormous PR machine is a telling sign. The focus should be on efficiency, better systems, more accurate data & accountability. -MM

    By Mark Montgomery @kyield on 2013 10 17

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About Roger Pielke Jr

I am a professor of environmental studies at the Center for Science and Technology Policy Research at the University of Colorado at Boulder. I also have appointments as a Research Fellow, Risk Frontiers, Macquarie University; Visiting Senior Fellow, Mackinder Programme, London School of Economics; and Senior Visiting Fellow at the Consortium for Science, Policy and Outcomes of Arizona State University. I am also a Senior Fellow of The Breakthrough Institute, a progressive think tank.

Click here to view his recent articles.