Developing a viable market for scientific research

Robert J. Shiller, Project Syndicate

Scientific advances are the fundamental cause of economic progress, and yet many nations often apparently hope to piggyback on discoveries made in more scientifically-advanced countries. This is the most practical and efficient strategy in the early stages of development. But, to reach the advanced stages of economic growth, a country needs scientific research at home.

Every government tries to encourage scientific research through education in science. But education by itself is of only limited use here. After all, science is a form of enterprise, requiring a sophisticated organization of resources and workers, an adventuresome attitude, and a willingness to take risks for possibly great rewards.

Normally, the market fosters the advance of entrepreneurial endeavors. Were such a market for science to exist, scientists would form enterprises, just like businesses, the best of which would succeed, while others would fail.

The problem is that basic scientific research is mostly a public good that cannot be withheld from those who use it and which seeps into the body of scientific know-how in unanticipated ways.

But if there is no market that impersonally values and rewards scientific achievement, how are good scientific projects to be selected and rewarded without the great waste that often accompanies non-market, bureaucratic solutions to the problems of provision of public goods?

There is a danger that scientific establishments may degenerate into fiefdoms controlled by scientific mandarins who dominate major state-funded university departments and laboratories.

Indeed, scientists in a number of countries, some with past scientific glories, may already recognize this malady in their own institutions today. The price their countries pay is a more sclerotic and slowly growing economy.

No perfect substitutes for the market in the area of scientific discovery exist, but a good surrogate, which enables scientists to compete effectively, is the system of peer review, i.e., the anonymous evaluation of research by scientific colleagues. Top scientists, sheltered by anonymity, can usually spot originality and can judge which scientific ideas have real value.

Peer review grew out of the first two scientific journals, the Journal des Sgavans in France and the Philosophical Transactions of the Royal Society in England, both founded in 1665.

These journals cast a wide net for the best research and relied on leading experts to evaluate ideas. But their support of scientific research was limited to publication.

In the 1940s, Vannevar Bush, a dean at the Massachusetts Institute of Technology and science advisor to President Roosevelt, advocated the creation of a government agency that would dramatically expand the impact of peer review by using it to allocate significant financial support to research enterprises.

In his 1945 book Science, the Endless Frontier, Bush argued that basic scientific research needs substantial and stable financial support; that support should be potentially available to all researchers; and that peer review should ultimately decide how and to whom funds are allocated. Those who dispense money, he argued, should look only at new research ideas, not at the organizational charts of research institutions.

His book led to the creation, in 1950, of the U.S. National Science Foundation (NSF), a major factor underlying America scientific success.

The use of anonymous peer review to assess proposals and allocate financial support for scientific research is increasingly achieving recognition around the world. Most major countries now have some kind of agency that issues general calls for proposals and uses peer review to evaluate them.

Problems remain, however, in making newly established peer- review systems work well. Smaller countries face difficulties in ensuring anonymity: the number of qualified scientists within a specific field may be so small that researchers can easily guess who reviews which proposals, and powerful figures can retaliate for negative evaluations of their unpromising research ideas.

This is an important reason why the proposed European Research Council is a good idea. Modeled after the NSF, it would augment the science foundations of individual European countries, creating a much larger research organization -- one that draws from a larger pool of proposals.

The size of the market for peer review is not the only issue. Countries with politicized universities, or universities where bosses with powerful connections outside academia run the research enterprise, find it difficult to fund the best scientists. The same is true in systems where there is a strong sense of bureaucratic entitlement.

Japan is an example of a country where the science establishment has been insufficiently reformed. Government bureaucrats used to target industrial research in the old days, but these efforts have been largely abandoned since the stock market collapse. The government then increased funding for basic research and created "centers of excellence" at universities, but it failed to dismantle the koza system, in which powerful senior professors often dominate research departments.

Greater progress is being made in Germany, where, despite popular opposition to an elitist university system such as in the U.S., Chancellor Gerhard Schroeder called last year for German universities to become much more competitive with each other. Similar changes can be expected in other countries, as the importance of scientific competition and entrepreneurship becomes better understood.

Policies that allow scientists to compete for resources nurture creative competition and allow people to construct appropriate incentives and risk-management structures.

They are part of a worldwide trend whereby natural and culturally specific obstacles to a competitive and financially sophisticated marketplace for scientific research are gradually removed.

There can be no free market for basic science in the literal sense of the term. But the benefits of markets can and should be pursued by other means.

The writer is Professor of Economics at Yale University, and is the author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century.