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Science and the Market Test

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Tags The EntrepreneurCalculation and KnowledgeMonopoly and Competition

Science doesn’t happen in an economic vacuum. There’s no Platonic laboratory where “pure” science occurs independent of human ideas, motivations, and institutions. Like other parts of the economy, scientific inputs and outputs are influenced by a complex system of ideology, regulation, and monopoly, and consequently, science faces many of the same challenges as for-profit business.

For example, at its most basic level, doing scientific research involves answering a universal economic question: how best to allocate scarce resources to improve human welfare. This problem hints that the logic of choice is every bit as important in the laboratory as it is in the supermarket.

In fact, it’s even more important in the lab, where scientists face tradeoffs between pursuing different types of knowledge, some of which can profoundly affect our lives. However, whether scientific research actually leads to growth and human progress depends on which types of science researchers consider most important, and how they choose between them.

Unfortunately, science as such doesn’t tell us much about either problem. Instead, human beings turn to philosophy and economics to help us decide which things we should value, and if there are suitable means available to achieve our ends. But let’s assume, in keeping with classical liberalism, that a primary goal of science is to improve the lives of as much of humanity as possible. What can economics tell us about how to encourage such “human” science?

We know that the supply of scientific and innovative talent tends to flow where rewards are greatest. For example, when advances in abstract science are rewarded more than advances in applied fields, we tend to get more of the former. A good place to start then is to think about which types of science carry the greatest economic and social rewards.

Figuring that out leads to a further insight: the exact distribution of “rewards” and “punishments” is largely determined by institutions, which influence the “payoffs” to different behaviors, and thus, how people act. Basically, scientific institutions reward the kind of research they’re interested in, which, if not guided by economic calculation, will have little relevance for the needs of the masses.

Put differently, science is only as good as the institutions that fund it. That’s not to say scientific results are necessarily biased if government foots the bill, or that abstract science has no purpose. The problem is that the fruits of such science are unlikely to be useful to most people—until, that is, entrepreneurs find a way to bring them to the marketplace.

More importantly, when science is separated from the market, it loses access to economic calculation, and thus, the ability to rationally allocate resources. That means that even with the best of intentions, scientific efforts to choose the most socially useful science, and to improve human welfare, are doomed to fail.

It’s for this reason government-funded science, although in some ways technologically impressive, usually results in a combination of outright waste, science for its own sake, and destructive military innovation. However, when markets fund science—that is, when consumers and entrepreneurs do the funding—society gets a steady stream of welfare-increasing advances in knowledge.

If such is our goal, we need to rethink scientific priorities, which means we also have to change the institutions driving them. To some extent, this transformation is already taking place: the digital revolution is encouraging the return of the individual inventor and offering alternatives to the large-scale R&D that’s dominated innovation for the past few decades. This decentralization of research, which is often consumer-oriented, is helping to encourage more commercial forms of science.

At the same time, however, research costs are being driven up by regulatory requirements and intellectual property laws that stifle creativity and entrepreneurship. These barriers must be removed if we want to take full advantage of our scientific potential. And as long as they remain, we’ll continue to get the science our institutions deserve, but not the science consumers need.

Matt McCaffrey, former Mises Research Fellow, is assistant professor of enterprise at the University of Manchester.

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