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MARKET FAILURE AND GOVERNMENT SUPPORT FOR SCIENCE AND TECHNOLOGY: ECONOMIC THEORY VERSUS POLITICAL PRACTICE
Abstract
The economic justification for government support for science and technology has been commonly based on the concept of market failure. The general theoretical argument is that governments should intervene in cases where the free market fails to achieve an efficient allocation of resources. In this paper, the inadequacies of the concepts of market failure as they apply to policy are outlined. Its use in the political process, given these restrictive shortcomings, is also considered. Examples are drawn from Australian experience in science and technology policy over the past few years to support the claim that the concept is neither a sufficient basis nor an adequate guide for government intervention. Rather it has been used to justify politically determined decisions. Special reference is made to the Australian Industrial Research and Development Incentives Scheme.
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NOTES AND REFERENCES
Much of this literature is summarised in D. C. Mowery and N. Rosenberg, ‘The influence of market demand upon innovations: a critical review of some recent empirical studies’, Research Policy, 8, 1978, pp. 103–53; reproduced in N. Rosenberg, Inside the Black Box: Technology and Economics, Cambridge University Press, 1982, pp. 193–241.
Committee of Inquiry into Technological Change in Australia (CITCA), Technological Change in Australia, Australian Government Publishing Service (AGPS), Canberra, 1980, 4 volumes.
A summary of all these strategies can be found in J. Falk, R. Johnston and D. Capp, Framing a Technology Strategy for Western Australia, Centre for Technology and Social Change, University of Wollongong, 1984.
R. Joseph, ‘Recent trends in Australian government policies for technological innovation’, Prometheus, 2, 1, 1984, pp. 93–111.
The concept of perfect competition is defined by four conditions. First, perfect competition requires that the product of any one seller be the same as the product of any other seller. Second, it requires that each participant in the market, whether buyer or seller, be small in relation to the entire market so that none can affect the product's price. Third, it requires that all resources be completely mobile. Fourth, perfect competition requires that consumers, firms, and resource owners have perfect knowledge of the relevant economic and technological data. The condition for a socially optimal allocation of resources is known as a Pareto optimum, which is defined as an economic situation from which it is impossible to make one person better off without making somebody else worse off. It should be noted that a particular optimum is specific to a given distribution of wealth and there are other Pareto optima for other patterns of wealth holdings.
R. Nelson, ‘The simple economics of basic scientific research’ in N. Rosenberg (ed.), The Economics of Technological Change, Penguin, 1971, pp. 148–63.
K. Arrow, ‘Economic welfare and the allocation of resources for invention’ in Rosenberg (ed.), op. cit., pp. 164–81.
K. Arrow, ‘Political and economic evaluation of social effects and externalities’ in J. Margolis (ed.), The Analysis of Public Output, National Bureau of Economic Research, New York, 1970, pp. 1–30.
C. A. Tisdell, ‘Research and development services’ in K. A. Tucker (ed.), Economics of the Australian Service Sector, Croom Helm, London, 1977, pp. 243–62.
R. S. Kaplan, T. Ijiri and M. Visscher, Tax Policies for R & D and Technological Innovation: Executive Summary, Carnegie Mellon University, Graduate School of Industrial Administration, Pittsburgh, 1976.
K. Pavitt and W. Walker, ‘Government policies towards industrial innovation: a review’, Research Policy, 5, 1976, pp. 11–97.
H. Demsetz, ‘Information and efficiency: another viewpoint’ in D. M. Lamberton (ed.), Economics of Information and Knowledge, Penguin, 1971, pp. 160–86.
J. Burton, ‘Epilogue’ in S. Cheung, The Myth of Social Cost, Institute of Economic Affairs, Sussex, 1978, pp. 69–91.
G. Eads, ‘US government support for civilian technology: economic theory versus political practice’, Research Policy, 3, 1974, pp. 2–16.
E. J. Meehan, Economics and Policy-Making: The Tragic Illusion, Greenwood Press, Westport, Connecticut, 1982, p. 144.
J. Hirschleifer, ‘The private and social value of information and the reward to inventive activity’, American Economic Review, 63, 1971, pp. 561–73.
Eads, op. cit., p. 11.
Australian Government, White Paper on Manufacturing Industry, AGPS, Canberra, 1977.
Industries Assistance Commission (IAC), Certain Budgetary Assistance to Industry, AGPS, Canberra, 1982; Australian Treasury, Technology, Growth and Jobs, submission to the Committee of Inquiry into Technological Change in Australia, Treasury Economic Paper No. 7, AGPS, Canberra, 1979.
Department of Science and Technology, Submission to the Committee to Review Productivity and Innovation Programs: Policy Issues, Dept. of Science and Technology, Canberra, 1981, mimeo.
House of Representatives, Parliamentary Debates, 30 April 1981, pp. 1830–53.
Department of Finance, Submission to Committee to Review Productivity and Innovation Programs of the Department of Science and Technology, Canberra, September 1981, mimeo, p. 4.
Australian Treasury, Productivity and Innovation Programs, submission to the Committee to Review Productivity and Innovation Programs, Canberra, October 1981, p. 18.
Committee to Review Productivity and Innovation Programs, Report, AGPS, Canberra, 1982.
IAC, op. cit., p. 91.
ibid., p. 59.
ibid., p. 90. Risk here refers to the classic Arrow source of market failure — uncertainty.
Australian Treasury, op. cit., p. 36.
Industries Assistance Commission, New Technology and Industry Assistance, Discussion Paper, AGPS, Canberra, 1983, p. 4.
Australian Government, op. cit., pp. 17–18.
Australian Treasury, op. cit., p. 40.
IAC, New Technology and Industry Assistance, op. cit. Arguments such as those used by the IAC imply that government support for key industries or technologies is not in line with enhancing overall welfare. It is implicitly stated that a private enterprise system is the best in terms of responsiveness and innovativeness. This is a conclusion which welfare theory does not explicitly reach, yet in arguments such as those used by the IAC they are made to appear inextricably linked. This tends to obscure the close links between positive and normative arguments about the appropriateness of government policy. The issue has been raised by Richard Nelson, ‘Assessing private enterprise: an exegesis of tangled doctrine’, Bell Journal of Economics, 12, 1, 1981, pp. 93–111.
For a summary on the Scheme's history see Department of Science and Technology, Submission to the Industries Assistance Commission on Certain Budgetary Assistance to Industry, DST Occasional Paper, Canberra, January 1982, Appendix 3.
P. Stubbs, Innovation and Research, F. W. Cheshire, Melbourne, 1968.
House of Representatives, Parliamentary Debates, 19 May 1967, p. 1852; 1 March 1972, p. 413; 8 November 1973, p. 3604; 2 June 1976, p. 2853.
CITCA, op. cit. It is interesting to note that in 1975, the Labor government was considering changing the Act. Concepts closely related to market failure were used in formulating the government's justification for supporting I R & D. The 1975 election prevented further changes.
House of Representatives, Parliamentary Debates, 8 April 1981, p. 1464.
R. Johnston, ‘Australian science policy: now that we can steer, where do we want to go?’, Current Affairs Bulletin, 59, 3, 1982, pp. 20–30.
IAC, Certain Budgetary Assistance to Industry, op. cit., p. 13.
ibid.
ibid., p. 92.
ibid., p. 91.
ibid., p. 78.
House of Representatives, Parliamentary Debates, 9 November 1983, p. 2469.
Cheung, op. cit., p. 21.
T. Schell, ‘Probable US responses’ in Z. Zeman and D. Hoffman (eds), The Dynamics of the Technological Leadership of the World, Institute for Research on Public Policy, Occasional Paper No. 13, Montreal, February 1980, pp. 34–5.
R. Nelson, ‘Technical advance and economic growth: present problems and policy issues’ in Joint Economic Committee (US Congress), Research and Innovation: Developing a Dynamic Nation, Special Study of Economic Change, Vol. 3, US Government Printing office, Washington DC, 1980.
Nelson, ‘Assessing private enterprise: an exegesis of tangled doctrine’, op. cit., p. 109.
Meehan, op. cit., p. 144.