by Mario Rizzo
What is the economic justification for using tax money to subsidize the production of economic research? The standard answer is that academic economists produce a public good. In other words they produce knowledge for which they do not charge and for which it is not feasible to exclude non-payers.
Let’s accept this basic paradigm and see where it takes us.
First off, the claim about the infeasibility of excluding non-payers is not quite accurate. Books are produced (especially textbooks) for which people pay the authors. It may, however, be argued that those who produce books are generally not the same individuals who produce, discover or invent the ideas themselves, that is, the originators of the basic research.
This is no doubt true in most cases.
Of course, the argument avoids the question, “Why shouldn’t these originators spend at least some of their time packaging their discoveries for sale?” Perhaps that would force greater relevance on to their research. But let that pass. We shall assume that they cannot spare the time or have a comparative advantage simply in producing the scholarly articles and research.
But our question is more basic: How do we know that what they produce is an economic good, public or otherwise? ( And how do we know the margin at which it is a good?) The answer may seem obvious – because people value it. Who values it? Do they value it in the sense that the ideas are worth their cost of production?
In economics the standard of value is willingness to pay. This standard does not disappear simply because we call something a “public good.” Public-goods theory presupposes that people do value ideas in terms of willingness to pay if we could somehow discern their underlying preferences. But we cannot simply assert this value. This must be some kind of evidence.
We do know that under current circumstances other economists seem to value the research. How much in the aggregate would economists be willing to pay for an article in the Journal of Economic Theory or Econometrica or The American Economic Review? Frankly, I do not know, but I surmise that the answer is not much.
Does the general public value it? After all, there have been many popular or quasi-popular books recently summarizing, simplifying and interpreting economic ideas. We have an obvious value imputation problem here. Those who transform the ideas often add something of great commercial value. Consider the aggregate willingness to pay for the “raw” scholarship as compared to the “processed” scholarship. I think it safe to say that the latter is vastly greater than the former.
People will argue that without the raw or basic research they would be nothing to process. In a certain sense this is obviously true. But this does not mean there is no possible substitution between research and processing – say, less research and more processing, or research of a different kind. It is rare that an ultimate output can be produced in only one way.
In the ordinary firm we do not usually worry, for example, about any factor being used where its marginal product is zero or even negative. We can also assume that the firm will substitute more of one factor and reduce another factor if such minimizes the total cost of production. All of this is the result of profit-maximization and competitive conditions. These are absent in the case of producing a putative public good.
Thus we can ask in the research case: Are we producing the ultimate public good – if it be that – with too much raw research or raw research in an inappropriate form? Must it be the form that it now takes – so unintuitive and so formalistic? If it were less so the costs of processing would be lower. Would the then processed-research be any less valuable to the educated lay public? I doubt it.
But even assuming that the form it takes is appropriate, is there too much of it relative to processing? Would more processing and less raw research be more efficient?
I have been assuming that we are dealing largely with applied economics. Let us look at what goes for economic theory these days. Theorists are generally completely uninterested in whether their applied mathematics has applications in economics or not. They are a world unto themselves. Who has the willingness to pay for this public “good”? Aside from their fellow practitioners, I cannot think of anyone.
The basic point that I am making is that many economists have too readily assumed that economic research as it is practiced today (especially what is called “theory”) is an ultimate or intermediate good with sufficient aggregate willingness to pay to justify public subsidy. To call something knowledge is not to answer the questions raised here.
Simply because, to a certain extent, it is infeasible (very costly) to exclude non payers from the fruits of this work is beside the point. The real issue is whether, and at which margin, it is a good? And a good of sufficient value?
If it is not, then what is going on? Intellectuals whether for reasons of personal satisfaction or enjoyment have convinced the government to subsidize their activities. From one perspective this is rent-seeking. From another perspective the state is buying support from the intellectual class. From still another perspective the state is creating a dependent group, affecting the nature and orientation of research, and encouraging rationalizations for government policies and plans.
I do not pretend to have written anything more than a series of explorations. But I will say this with greater certainty: The case for government subsidy of economic research, especially economic theory, as practiced today, has not been convincingly made.
Postscript: To those who object that I am “commodifying” knowledge, I only answer that I am simply trying to apply economic analysis to the production of economic research. In addition, I challenge them to come up with an alternative criterion that will tell us when there is too little or enough in this world of scarce resources.