Solutions to this [public goods] problem in the context of basic research are discussed at some length by Terence Kealey. (The Economic Laws of Scientific Research, New York: St. Martin’s Press, 1996) Knowledge of current cutting edge research – Kealey’s field is biology – is of considerable value, and it is not the sort of knowledge easily summed up on a one page memo. In practice, the knowledge is largely restricted to the people doing the research, both because they are the ones who can understand each other’s work and because they are the ones that the other researchers want to talk to. That makes such researchers valuable employees and consultants for firms and universities. While the researchers are unlikely to internalize the entire value of the information they produce, they may internalize enough so that the resulting income, along with nonpecuniary rewards of their work, make their research worth doing for them, and subsidizing for firms and universities. Kealey’s conclusion, looking at several different fields where government subsidies went from near zero to very substantial, was that there was no observable effect on the rate of progress in the field. One might interpret that as evidence that the cost of misallocation of resources through the political mechanism – diverting smart people into whatever field looked good in the popular imagination at the moment – at least balanced the benefit of the additional money.
David Friedman: Do We Need a Government? Emphasis added. (It’s easier to read in the December 2005 issue of Liberty, because David’s file uses nonstandard encoding for characters such as dash and apostrophe.)