Marian Tupy: Hello, and welcome to the new episode of Human Progress podcast. Today with me is Dr. Terence Kealey. He’s an adjunct fellow at the Cato Institute, and for many years, he was the President of University of Buckingham, which is in England, Britain, and it is the only fully private university in that country. He was educated at Oxford University, and is a renowned author on a number of subjects, but primarily he’s researched on research and development and what role governments play, or should play or should not play in research and development. He has published around 45 original peer-reviewed papers and around 35 scientific reviews. In 1996, he published his first book, The Economic Laws of Scientific Research, in which he argued that contrary to the conventional wisdom, governments need not fund science.
Marian Tupy: His second book, Sex, Science and Profits, came out in 2008, and that argues that science is not a public good, but rather is organized in invisible colleges, thereby making government funding irrelevant. He’s also an opponent of breakfast, and has a book arguing that people shouldn’t partake in breakfast, and that will make them healthier. But we are not going to talk about that, we are going to be talking about research and development, why is it important, what role government should play in it. And with that, welcome, Terence, to the podcast.
Terence Kealey: Thank you very much, Marian. It’s lovely to be here.
Marian Tupy: Terence and I, I should say, are good friends. And there is a subject matter on which we have disagreed over the years, quite [0:02:09.4] ____. That is the subject of Brexit, not breakfast, but Brexit. Terence was for the UK remaining in the EU, I was against it, because I bought into the vision of Great Britain as a free and independent country that embraces small government, open economy, liberal economy. And I thought that was what Brexit Britain would look like. Alas, straight after Boris Johnson became prime minister, he embraced a man by the name of Dominic Cummings. Dominic Cummings is a very, very smart and knowledgeable person. However, Dominic Cummings is also a grand believer in government playing a massive role in research and development, which made me think that perhaps the future of Britain was not going to be small hands-off government type, but instead, it was going to be one where the government was going to play a much greater role than I could have imagined. And indeed, since then, that’s exactly what has transpired.
Marian Tupy: So what I want to talk to Terence about is that. But before getting into Boris Johnson and Dominic Cummings, and the future of Britain, I want to ask you, Terence, start by asking you, what was historically the government’s role in research and development? And why is research and development important?
Terence Kealey: Thank you. Well, the history is very revealing. The continent of Europe has always believed that governments should fund science. And I say always, ever since basically, Francis Bacon suggested that in 1605. What is very interesting is that the English-speaking world, Adam Smith, and then latterly, the United States of America, didn’t believe that. And one of the great historical experiments is that between around 1650, roughly, and 1940, about a 300-year period, you see continental governments funding science really very generously, and the English-speaking world, not governments, not funding science. And what’s interesting is that the industrial revolution is first British, and then American.
Terence Kealey: So the history is very clear, very clear, startlingly clear, that the countries that fund science did not have an industrial revolution and the countries whose governments did not fund science did. Now, you ask why it’s important. And it’s very important, actually, even to the current debates over globalization, because the question is how does a country, how does a community enrich itself? And the answer is through R&D, through technology. We today are richer than our parents were, because we have, well, we have wifi, we have Zoom, we have all these technologies. And these technologies come out of research and development. And therefore, the reason that we are all now so comfortable, as opposed to just 200, 300 years ago, when people basically starved as a matter of course, is because of technology, and technology comes out of R&D. So R&D is important because it’s the basis of modern rates of economic growth, and the empirical evidence is very clear that the government funding of R&D not only doesn’t stimulate economic growth, but might even damage it.
Marian Tupy: Fernand Braudel, the great economic historian, not a fan of capitalism or free markets, but in his book, Capitalism and Civilization, says, in a way, everything is technology. What separates us from people living 10,000 years ago, let alone people living 100,000 years ago, is technology. The resources that we have have always been there. Trees have been there, iron has been there. Copper has been there. But it’s the amazing things that we can do with it which make the present life so much better than the life that our ancestors had. When did people start appreciating that science is key to human betterment?
Marian Tupy: You will remember the story of a man who brought unbreakable glass to Emperor Tiberius, and Tiberius asked him, “Did you share this knowledge with anybody else?” And the inventor says, “No, I haven’t.” And so Tiberius had him put to death because he was worried that this new technology would make precious metals from which cups were made and what have you, that it would make them invaluable, or rather, it would deflate their value. So clearly, people were suspicious of technology. But you say that in modern Europe, and by modern I mean after 1650, things changed. Where did the change come from?
Terence Kealey: Well, you’re absolutely right. I mean, that’s the famous story. There are other similar stories, actually. Queen Elizabeth I of England is said to have rejected genuine innovators who wanted patents for genuine inventions, because she was worried it would displace current industries and current people from their jobs. The realization that knowledge is the source of economic growth basically starts in Europe around the year 1000. So you get, for example, the University of Bologna, created nearly 1000 years ago, as an institution designed to increase understanding and knowledge of particularly law.
Terence Kealey: But similarly, more or less at the same time, other Italian universities arise, Padua, to create new disciplines in medicine. And soon thereafter, very importantly, we have Fibonacci, who, in the very early 13th century, introduces to Europe modern mathematics. He invents or he rather, he imports the idea of a decimal point, of a zero, so that we can not only account in terms of accountancy of companies, more accurately double entry bookkeeping, but also we can start to navigate our ships more intelligently.
Terence Kealey: And so what actually happens from slow origins around the year 1000, particularly in Italy, where economic growth restarts, about 1000 years ago, actually, as economic growth restarts in Europe after the long period at the end of the Roman Empire, with the invention of economic growth, because that’s essentially what you see in Italy, the invention of economic growth, and then it goes to the Netherlands, and then it goes to Britain, and then it goes to America, and then it goes global. With the invention of economic growth comes at the same time, in fact causing it, a respect for the idea of new technologies and new ideas. They come together.
Terence Kealey: And in the early years, in Italy, it was the free market that produced the early universities and the early schools for navigation and mathematics. And then eventually governments nationalized these universities, because they and the churches worry, just like your story of Tiberius, they worried that these dreadful people called scholars and researchers and merchants, [0:09:36.4] ____ standing merchants, would undermine the social order. So there’s this perennial tension.
Terence Kealey: And eventually, and this is the sort of argument you get from Deirdre McCloskey, and I don’t fully buy in her argument, but she’s certainly not wrong. I just think it’s more complicated than that. But certainly with people like Deirdre McCloskey explaining, you get to the point where merchants and commerce are no longer seen as the enemies of the established order, but rather as a movement that can be channeled by the established order to help enrich it and society. And at that point, you start to get economic growth really taking off.
Marian Tupy: Now, not to get too granular, but can I push you a little bit on the 1000 years ago? So it may well be that you have instances of innovation 1000 years ago, like for example, reading glasses, which I think are developed in Europe around 1300, maybe slightly sooner. But sustained economic growth and sustained innovation, that’s the story of the last 250 years or so, would you go along with that?
Terence Kealey: Yes. Although there is a very interesting scholarship coming out from a group of people in the University of Warwick in England and has been confirmed by other scholars such as Meir Kohn in Dartmouth. The reason sustained innovation is so rare is not that innovation doesn’t sustain itself, it’s that nasty people called kings or bishops or barons come along and destroy it. Actually, innovation is quite easily self-sustainable. As long as you don’t stop it, it becomes very sustainable very quickly. And Martin Ricketts and I, Martin is a professor at Buckingham, have written a couple of papers actually modeling this mathematically.
Terence Kealey: Once you have a group of people inventing new things, then it becomes in everybody’s interests to share in that joint invention, because you can’t access the knowledge of other people unless you’re yourself creating knowledge. You, Marian, or I would have it… We wouldn’t be able to make a silicon chip. I can clone a gene, you probably can’t. But the point is only specialists can exploit new technology. But once you have a group…
Marian Tupy: I definitely can’t. I definitely cannot clone a gene, just fyi. Anyway.
Terence Kealey: Well, I have. But I certainly wouldn’t know how to make a silicon chip. Once you have a group of people who are creating new wealth generation technologies, it makes a lot of sense to join that group of people to learn how to do those technologies, to make your own new technologies so that you can join the party. And at that point, the whole economy becomes self-sustaining, which is what happened from initially, initially in Italy, but they got crushed, and then the Dutch, but they got crushed. And then in Britain, and nobody crushed Britain, basically, because the English channel more than anything, and also the fact that it was a democracy. But then, of course, government in Italy, the Italian city states and the Dutch provinces, it wasn’t democratic, but those governments were representative within those city states. So they had a sort of representative government that allowed merchants and innovators to take off.
Terence Kealey: But what happened in Britain is that no one came along to invade us. That was the really important thing. And so the British created this huge technological burst that the Americans and then others took off. So the sustained technology is the key thing, Marian, but you get there not by encouraging innovation, because actually it comes together spontaneously once it becomes profitable, but stopping predators from destroying innovation.
Marian Tupy: Joel Mokyr, an American economic historian, wrote somewhere that innovation is an act of rebellion and that the problem with governments is that they don’t like rebels. They don’t like people who object to the status quo. In other words, whichever elite is in power, they are very interested in keeping that power and they have a vested interest in the status quo, and technology is very disruptive to the status quo. And therefore governments typically try to eliminate these sort of pockets of innovation rather than promote them. At least that was the historical case. And I think that’s also the point that Steven Davis makes in his book about the importance of elites in strangling innovation in the past. Is that basically what you’re saying?
Terence Kealey: Yeah. Mokyr is, I mean, like Deirdre McCloskey, he’s had a very real insight. It’s more complicated than that, but he’s absolutely not wrong. And in fact, if you look at the Italian city states where it all starts, you look at the Dutch republic where then it takes off and then you look at England, actually it’s true that innovation is revolution, but in fact, it flows on the fact that the politics of these the city states in Italy and then the Dutch, they themselves are born of revolution. So what actually happens, if you look at the history of Italy, you actually see, ’cause Italy is very mountainous. So it’s relatively easy for a small, relatively small community in a little valley behind mountains to keep nasty predators away. What happens initially is a group of quite modest people come together and repel in an act of revolution the Pope or the duke or whoever it is.
Terence Kealey: And these people are merchants and they’re traders because that’s what people are, because they’re not barons. That’s the whole point. They are the middle classes. And once having got that, a rebellion against the king, they then foster trade within that community. So Mokyr and Davis are absolutely right, innovation is an act of rebellion, but the rebellion doesn’t start with the innovators as innovators; the rebellion starts with merchants as merchants, keeping away rapacious predators, and it’s always geography. Italy became the heart of the new industrial revolution back in the, around 1000 to 1100 AD because it was mountainous, so easily protected, and in the middle of the Mediterranean, in the middle of all of the trade routes. Equally, the Netherlands, behind those huge rivers, the polders, they were very difficult to invade and very easy to defend. And then England behind the channel.
Terence Kealey: So innovation comes out of revolution and indeed innovation is revolutionary and in a stable society, the revolutionaries are crushed. But the actual act of revolution is the creation of the city state or the province, and then innovation is released because the people running those city states and provinces have a vested interest in further innovation. If you’re an Italian city state, you want your wool to be better than the wool generated in the Netherlands, because you want to… Because you’re engaged in a commercial battle. So Mokyr is quite right, but the initial actual revolution is actually political not technological.
Marian Tupy: And would you agree with me that the elite doesn’t necessarily have to be just a king or a prince or a pope or whatever? I mean, it could also be bureaucracy. I mean, what we are seeing in the Western world especially is the slow strangulation of economic growth through excessive regulation. I sort of think about the people who live in Washington DC as the new American aristocracy. Americans are very proud that we don’t have an aristocracy here. But in fact, we do. These are the permanent bureaucratic class, which is unaccountable, cannot be fired, very well compensated, and they justify their existence by churning out more and more regulations, laws and so forth, which have a negative impact on research and development.
Terence Kealey: The extraordinary thing is that guilds, which are basically anti-competitive cartels, but of producers, often quite modest men. It was always men in those days. I’m not being sexist here, it’s just how it was. Guilds of actually quite modest men and craftsmen are basically coterminous with markets. The moment you get markets, almost the first thing humans do is to create anti-competitive measures. And yes, the elites do it, but so do ordinary people in the guilds. And so the problem with markets from day one essentially has always been anti-competition, because once people have an established monopoly of some sort or other, they want to protect it from being undermined.
Terence Kealey: The buggy whip manufacturers must have looked upon the motor car with great distress. And so what Schumpeter called creative destruction is the basis of economic growth and those people who are being destroyed don’t look upon it kindly. Certainly in America, and I’m English, so I must be careful not to pontificate in a way that may be seen as offensive, but certainly in America, one of the extraordinary things is this extraordinary rise of credentialism. If you want to be a hairdresser in Alabama, you’ve got to go to university for 20 years and have a PhD before you’re allowed to set up shop, an extraordinary thing.
Terence Kealey: But let me console you with this thought. This has always been the case. It’s not unique to America today. Every country has anti-competitive measures that spontaneously arise, ’cause that’s just how human beings are. And B, so there’s nothing special about America, it’s always been that way. In a sense, it’s a reflection of the strength of economic growth, that the strength of the anti-economic growth is so strong. But secondly, if you look at the simple GDP per capita data, GDP per capita is growing in America very strongly and actually probably at slightly increased rates every 20 or 30 years, the rate actually slightly increases. So we can lament what’s happening, but we needn’t worry too much about it. Fundamentally, things look pretty good on the economic growth front.
Marian Tupy: Okay, so it’s in the Anglophone world, especially Great Britain and then in British offshoots such as the United States, that we see the birth and maturation of industrial revolution, new technologies, etcetera. And all of that is done without too much, perhaps any government input. But that changes at some point. So how did we get from a place where the government was basically satisfied to let the market run, innovators come and go, succeed or fail, to a place where the government is heavily involved in R&D? Can we quantify the government’s involvement in R&D in the United Kingdom and the United States? And how did we get there?
Terence Kealey: That’s a very good question. We can quantify it and we can date it with astonishing accuracy. The American government, basically, until 1940, did not fund research, developmental science. It just didn’t. It had what was called mission research. So there was the Coast Guard, and the Coast Guard needed certain basic technologies. There was the army, and the Army Medical Corps needed certain technologies. So in as much as the government took on certain functions in the United States of America, and I’m going to talk about the United States rather than Britain, because the United States is such a clear story. But Britain’s the same story, it’s just the United States is the major part of the world today.
Terence Kealey: Until 1950, the United States government did not fund science except for particular missions, one of which was defense. And for political reasons we needn’t go into, though it had no positive effect, one was agriculture. Agriculture… America was an agricultural nation for a very long time. Farmers were very poor in America. That was one of the great problems of America for nearly 200 years, was poor farmers. And so they managed to extract benefits from the state which did no good at all. All the big advances in agriculture came from the private sector. So let’s forget agriculture. Let’s forget defense. But all the Manhattan Project and all that, all that was the Second World War.
Terence Kealey: And after the Second World War was over, the Office for Scientific Research and Development that created Manhattan or penicillin or whatever, it was all disbanded. It’s extraordinary how America was laissez-faire in research until 1950. And the problem in 1950 when the National Science Foundation was created was the Cold War. Truman had recognized by 1950 that America was at war again, this time with Russia. It was a Cold War, but in war you need more scientists. You don’t need them in peace. In peace-time, the market produces as many scientists as it needs for obvious reasons. But in war-time, you need to boost that.
Terence Kealey: And so with Korea and all the other Cold War things beginning to happen, Truman creates the Natural Science Foundation as a wartime measure. And then in 1957, the Soviets launched Sputnik. It’s funny now to think what happened. But in 1957, people thought Russia was going to overtake America economically and technologically. Just as people today, lunatic people today, think that China is going to overtake America. It certainly won’t, by the way. But forgetting China, in 1957 the Soviets launched Sputnik. Soon afterwards, the Soviets launched the first dog that goes around the Earth in orbit, then the first human, Yuri Gagarin, goes around the Earth.
Terence Kealey: And Americans all believe they’re going to be nuked from space and will die. And this causes a real moral panic in the United States of America. And very, very quickly, within the year, in 1958, NASA’s created ARPA. Later DARPA’s created. And then the National Defense Act is created, Education Act, sorry. But then, there’s a very interesting phenomenon, a really interesting phenomenon for those of us who would like to respect intellectual activity and sometimes find it difficult. Because this huge swamp of American government money into science came across an ideological problem. Because that was the Soviet model. Just as before, it had been the Nazi model. Does that mean that communism produces economic growth in the way that markets do not? Is that why the government? And so there is this terrible problem that arose in America, an ideological problem, that the American government was apparently copying communism, and it needed a solution.
Terence Kealey: And this came from two economists in particular, Richard Nelson and Ken Arrow. Ken Arrow won a Nobel Prize, not for this work, but as part of it. They came up with some mutual mathematical models which showed perfectly that markets were wonderful at everything apart from research. That was the one exception. And so the American government should fund research, but needn’t worry about giving any credence to communism for any other respect, because it was only research that was a public good. The models that Ken Arrow and Richard Nelson produced were utterly fictitious. They deliberately… Deliberately is a strong word, but it’s very hard to avoid that, mixed up arguments from what economists call classically competitive markets with neo-classically competitive markets.
Terence Kealey: I’m not going to go into the difference now, but a classically competitive market, a sort of Schumpeterian or Adam Smith market, is a very different thing from a neoclassical or marginal revolution market, which is a total fiction and doesn’t exist, but is a very interesting mathematical tool. But if you’re clever and you draw your arguments from the two markets, it’s very easy to prove, as Ken Arrow and Richard Nelson did, that in a perfectly competitive neoclassical market, only governments would fund science. Well, that’s the definition, by the way, of a neo-classically competitive market, that governments have to fund science, because the markets certainly won’t, but we don’t live in such a world. The world we live in is a classically competitive market that Adam Smith or David Ricardo described. And in such a world, you don’t need government funding of science.
Terence Kealey: So anyway, endogenous growth theory, as it’s called, started around 1960 with papers from these two. And ever since then, the academic community has said, “Look, we have proved that governments have to fund science. Here are the mathematical formulae, please fund us.” And I’m afraid it’s a 60-year-old scam. Endogenous growth theory, I regret to say this, the central theory by which economists describe economic growth, is just a scam to make sure that governments fund universities, including departments of economics, generously.
Marian Tupy: That is absolutely fascinating. We probably need to unpack this a little bit, but before going there, are you familiar with Eisenhower’s last speech? What was it, The Farewell to a Nation speech?
Terence Kealey: A brilliant speech.
Marian Tupy: So you take it over. Everybody knows when he complains about the military industrial complex. But there is a paragraph right below it, which talks about the scientific complex.
Terence Kealey: Yeah. And there’s another paragraph where he describes how the government funding of science has destroyed the university in America as a center of free thinking. He says in this brilliant speech, don’t forget, Eisenhower was President of Columbia University for four or even six years, I can’t remember how many, but he actually knew about universities, he ran one. An independent one as well. And in this speech, he says, “It’s a terrible thing. Academics are no longer judged by the quality of their scholarship, they’re judged only by the size of their government grants.” And this is a corruption of the modern university. We have lost the university as a center of thought telling truth unto power, and we’ve turned it instead into an agency of the scientific military industrial complex by which academic scientists, government institutions and large companies, like the aircraft companies and the defense companies, have all come together in defense of a model that is transparently false.
Terence Kealey: Endogenous growth theory, as I call it, is transparently false. But the model says very comfortably, America will no longer be safe militarily, the American economy will no longer grow healthily unless the American government gives lots of money, not just to universities, but also to big industries. And in this complex, as he described it, it’s just basically a scam. Just as, by the way, though he didn’t say this in his speech, but you could say the French Gothic cathedrals or the Egyptian pyramids were scams. The pharaohs assured the people of Egypt that they would only to go to heaven if the pharaoh went to heaven, and the pharaoh needed a big pyramid to give him a launching pad. And equally, in the 14th century in France, the French kings and the archbishops persuaded the people of France that they had to impoverish themselves to build these big cathedrals, which also point up, or they wouldn’t go to heaven either.
Terence Kealey: Well, it’s the same thing with the military industrial scientific complex that Eisenhower exploded. The whole thing is based on a false assumption that only with the government funding of science will the American economy grow. Because remember this, between 1776 and today, the American economy has grown in a very steady way. In 1950, and then later in the 1960s, you get this huge, I mean truly vast expansion of government funding for science in America, and rates of economic growth do not change. It has been utterly exploded as a theory, but you never hear this, because it’s in nobody’s interest to [0:29:29.4] ____.
Marian Tupy: Well, just to finish up on Eisenhower. Obviously, the 10 years between 1950 and 1960, I think he ends his presidency in 1961, must have been very different from what people were used to. The fact that he puts criticism of the link between science and government in his farewell speech, which obviously, you cannot go on forever. You cannot address all the things that you are concerned with. The fact that it’s one of the main points in his farewell speech is, in my view, telling that it was something new, something unprecedented, as something that he was really concerned about, but couldn’t, apparently didn’t revert, quite the contrary.
Terence Kealey: It was completely new. In various publications that Martin Ricketts and I have written, I’ve described how employees of the NIH, National Institutes of Health, or the NSF described going round to the universities selling them research grants. Universities until 1950 were basically liberal arts colleges focusing on teaching and scholarship. They weren’t centers of research. They were turned into centers of research by this flood of government funding. Equally, industry, until 1950, had been taught that it had to rely on itself, not on government handouts. But since then, it has become a huge begging bowl for government handouts. And Eisenhower was at that pivot. He actually saw it happening, which is why he recognized it, and which is why he made this very brave speech. You’ve got to be quite courageous to take on these huge vested interests.
Terence Kealey: But of course he was succeeded by John Kennedy, and Kennedy’s obsession was get into the Moon before the Russians. He judged himself by that achievement. Unfortunately, he didn’t live long enough to see it, but he absolutely set that off. And John Kennedy poured money into science, because he wanted to beat the Russians. All that money, of course, was utterly wasted, we got no economic benefit from it. But it was Eisenhower who lived through that transition from America as a nation of free markets, to America as a nation of corporate welfare and academic welfare. He didn’t like what he saw, and he had the stature to criticize it. But after JFK, it has become almost politically impossible to criticize the American government funding of science, because that immediately makes you persona non grata amongst practically every human being in the world.
Terence Kealey: Oh, I can’t hear you. I still can’t hear you.
Marian Tupy: Can you hear me now?
Terence Kealey: Now, yes.
Marian Tupy: Okay. Let’s go back just for a moment to the endogenous growth theory. And can you sort of explain it in very simple terms to our listeners, and what, if any, role does the theory of public good play in the theory, and how R&D fits into everything?
Terence Kealey: Yep. Endogenous growth theory says very simply, this. It says the private market will not fund science, because if I come up with some scientific advance, you, Marian, my competitor, will copy me more cheaply than it had cost me to make the innovation. So, I invent a new form of technology, it doesn’t matter what it is, I spent a fortune inventing it, but before I can get any return on my investment, you simply copy it and steal the market from me. And I’ve been impoverished by the R&D and you haven’t, so you can actually then push me into bankruptcy. That’s what endogenous growth theory says.
Terence Kealey: And endogenous growth theory came out of the world of economics. What is interesting is that no scientist has ever said that. Only the economists have said this. Because it is simply a myth. The empirical evidence is overwhelming that actually it costs as much to copy as to invent once you can add together both the average costs of copying and the marginal costs. Let me explain what I mean by that. So to come back to our earlier conversation, if I clone a gene and you say to yourself, “That’s very clever. Terence has got a new technology there that’s very profitable, I’m going to copy him.”
Terence Kealey: Well, Marian, you won’t be able to, ’cause you don’t know how to clone a gene. So what you’ve got to do first of all is build up a huge R&D capacity in your own company by which you then are equipped to copy me. And by doing your own R&D to get the tacit knowledge by which you can then learn from me, you then produce your own R&D. So the price you pay to copy me is the R&D you yourself produce, which then in my turn, I can copy. And this is something that the economists have simply ignored. They have just pretended… And pretending is a strong word, but really it’s not that inaccurate. They have pretended that the flow goes only one way, that anybody can copy anyone else and therefore the costs only come from invention. Whereas in fact, copying is as expensive as invention.
Terence Kealey: And this has actually been shown by economists such as Mansfield or Griliches or Nathan Rosenberg. But these disproofs are always ignored because this is empirical work that’s tucked away into the research policy world while the economists of endogenous growth theory ignore all the empirical disproofs and simply reiterate time and time again. So for example, there is a book, I’ve got in front of me here, called The Power of Creative Destruction, by Philippe Aghion. It came out earlier this year. Earlier this year, and Aghion states quite categorically, “Science is a public good because it’s easier to copy than to invent.” But it’s just not true. Try copying without inventing. It can’t be done.
Marian Tupy: Fascinating. Patents, what role do patents play in making sure that the scientist, the Terence Kealey of this world, will pursue his passion for cloning genes?
Terence Kealey: Patents are a scam. Patents, remember, came out of the medieval world where everybody monopolized everything. In medieval Europe, people believed that if you invested in anything, it didn’t matter what it was, if you invested in anything, and then a mill, say, a water mill or a windmill, and then someone set up another mill within easy distance of your own, that that was unfair. Because you’d invested in your mill, so it was wrong that your investment should be undermined by someone investing in their competitive mill and stealing your market. We no longer believe that. We now know that that is a false argument, that actually markets do very well by competition.
Terence Kealey: Well, patents are… And you can see this, it goes all the way back to the Statute of Monopolies of 1624 in the English Parliament. In 1624, the English Parliament abolished all patents in a most extraordinary… In those days, 99% of the patents were just for existing industry, so the whole of the soap industry, or the whole of the salt industry was owned by one exploitative man, always a man, of course. In England, it was a shocking situation, which is why we had no Industrial Revolution in those days, because the moment anyone had anything, it was monopolized by a big man who went to the king, paid for the money, got the monopoly, and then killed anyone who tried to interfere with his monopoly.
Terence Kealey: In 1624, all that is abolished. And that’s when the Industrial Revolution starts, by the way, with the abolition of universal patents. But they made the one exception for patents for inventions, because they assumed that patents for inventions, unlike patenting pre-existing businesses, wouldn’t throw people out of work. You would just create new things and therefore that would be very, very good. But the thinking behind it is exactly the same as medieval thinking. If you’ve done R&D, it’s not fair. “Mummy, it’s not fair,” that someone comes along and copies you. That is a complete mythological argument. The reality of research is it’s a collective activity. Even industrialists, people don’t recognize this, even industrialists come together to do research jointly, because research is very difficult and you can’t make new discoveries unless you share.
Terence Kealey: So for example, take the great American discovery of 100 years ago, the Wright brothers and the airplane. There’s this big myth that the Wright brothers were these isolated bicycle manufacturers in Dayton, Ohio, doing their own thing, inventing the airplane. Absolutely not. They exchanged well over 100 letters with one of the major… There was a network of letter writing, and they sent well over 100 letters revealing the advances to date, and receiving back from this network huge information that other people had done. They were absolutely part of the network, because all major inventions come out of networks. And so the idea that you need patents to incentivize discovery is wrong. Because what patents do is they make it very difficult for people within networks to share knowledge. Because the whole point in patents is to stop people sharing knowledge.
Terence Kealey: We are rich today because we no longer do what they used to do in the days of the alchemists, which is to keep research secret. We don’t keep research secret. The moment we make a discovery we publish it in a paper, we go to a conference. And even industrialists do this. There’s a big myth that industry is secretive. Oh, no, it’s not. Edwin Mansfield showed that within a year of a company making a discovery, all its competitors knew everything there was to know about their discovery. Partly because scientists from competitive companies are always sharing knowledge, partly because scientists move to other companies and take the knowledge with them, and partly because of reverse engineering. Companies buy each other’s technologies and then reverse engineer it. There is no such thing as industrial secrecy. There’s only first-mover advantage, constantly trying to keep ahead of the competition by constantly doing more and more R&D.
Terence Kealey: Now, patents are a scam by which you try to stop doing more R&D. Patents are a scam. Just like in medieval Europe, you went to the king, gave him a large sum of money and said, “Please protect my patent, my monopoly in watermills and kill nasty people building competitive watermills.” So patents are… They are a scam by which you go to the king and say, “Look, I’ve done all this R&D. Please give me a permanent monopoly and kill all my competitors.” To which a king, if he’s sensible, says, “Oh, no. If you want to keep ahead of your competitors, now you do the next bit of R&D.” And by the way, if you look at Microsoft and Facebook and all those big companies, although they do have patents and also copyright, they’ve often used copyright very successfully, what they really do is pour money into R&D to keep ahead of the competition. Markets absolutely incentivize R&D to keep ahead of the competition. And patents are a scam by which you try to kill the competition and therefore don’t invest in R&D and just give the money to the shareholders. Thank you very much.
Marian Tupy: So the argument that without patents people would have no incentive to innovate, you don’t buy that?
Terence Kealey: Well, it’s very simple.
Marian Tupy: What would be your incentive to clone that gene if you couldn’t patent it? What benefit would you get from it?
Terence Kealey: Yeah. Well, the answer to the scientist or the company or the industrialist who says, “Without patents I won’t do R&D,” the answer is, “Fine. Don’t do R&D and see how long you survive before going bust ’cause it won’t be long. You will go bust unless you do R&D.” Schumpeter explained this very, very well. R&D is a totally defensive measure. If you don’t do R&D, the competition come up with a new technology, you go bust. So, to answer your question… There’s a slight exception in pharmaceuticals, actually. Just a slight exception in pharmaceuticals because the regulatory burden in pharmaceuticals is so high that that is the one exception where you do need patents. But forgetting that for the time being, you asked me why would you clone the gene. Well, the answer is this. Let us pretend that the gene is for a messenger RNA vaccine against COVID-19. What would be the incentive, if you’re BioNTech or Moderna, to clone the gene for an mRNA vaccine against COVID-19?
Terence Kealey: Now, let me think. Oh, I know. Trillions of dollars of profits is the incentive. And if you’re worried about Moderna or Johnson & Johnson or AstraZeneca competing with you, then what you do is you just make sure that the next reiteration of your patent, and by the way, there are new variants coming out all the time thanks to nature, that the next iteration of your patent is even better than the former one. You can rely solely on competition. And the company… And you can actually see this in the pharmaceutical industry. The companies whose genes for COVID-19 vaccines failed, and many of them did fail, by the way, they haven’t made a penny profit. But the companies whose vaccines succeeded, they are rolling in money. And deservedly so, by the way. Good for them.
Marian Tupy: And we have benefited. We have benefited.
Terence Kealey: We have all benefited. That’s how markets work. We have all benefited, but the inventors have benefited especially, and good for them.
Marian Tupy: Agreed. Matt Ridley argues that we over-emphasize genius, insights that individual investors have on their own. It seems to me that you are arguing for something similar. Instead of emphasizing individual contributions to the growth of scientific knowledge, inventions, innovations, you emphasize the communal nature of it all where you learn from dozens, maybe hundreds, maybe thousands of people. You are just the guy who puts it all together to come up with some sort of a small move toward the future. Is that how you see it? Or are inventors and innovators geniuses?
Terence Kealey: Matt Ridley is quite right. This actually goes back to the scholarship of the great sociologist of science, Robert Merton. What Robert Merton pointed out is that simultaneous invention is the norm in science. What is usual in science is simultaneous invention. And the example Matt Ridley points out is that when Edison went to the patent office in the States for his lightbulb, he went there in the morning. And that very afternoon another inventor came to the patent office with their patent for the lightbulb. That very afternoon. Same day. At the same time in Britain, Swan was putting in a patent for the lightbulb. And Matt Ridley has collated, I think it’s either 17 or 27 simultaneous patenting of the lightbulb across the globe. Every country in Europe, basically, there was an inventor patenting the lightbulb that same time.
Terence Kealey: And the reason for that is that research is communal. The whole point of research is that we’re not secretive. The whole point of research is we all have the same information. We’re constantly sharing information. The researcher who doesn’t share their information finds that no one else shares their information with him or her, and so they get left behind. The most successful inventors are those who share their inventions most prolifically, so they get most ideas back. And then with a huge portfolio of ideas, they can then work out the best way forward. Invention is communal. It’s collective. And also, and this is something Matt Ridley and I share in common, Matt and I are both biologists.
Terence Kealey: Charles Darwin, in his book, The Descent of Man In Relation to Sex, pointed out that evolution through sexual selection as opposed to evolution through natural selection, evolution through sexual selection is why we’re creative. We are all creative. Creativity is normal. You’ve only got to look… And I’m just… I’m trying not to be sexist here, I’m just describing the most obvious example of creativity. You only have to look at the way women are constantly changing their makeup or their hairstyles or their clothes, because as Charles Darwin explained, that sort of creativity is how women, amongst other ways, of course, attract potential partners, and men do the same in different ways, and societies do things in different ways. Creativity comes from sexual selection. We are all creative, all of us. Now, some people are undoubtedly more creative than others, some people are braver than others, and therefore some people make better entrepreneurs than others, but this is a normal human quality.
Terence Kealey: Anton Howes points out that entrepreneurship and creativity can be honed and improved by different institutions, and that’s true as well. Nonetheless, Matt Ridley is absolutely right. We all are entrepreneurial, we are all creative, we all have social ambitions, and in research, which is a totally shared activity, including between industrial competitors, do not let industries pretend that they don’t collaborate with their competitors, because they absolutely do. And this is a communal activity where people share knowledge and actually it just becomes a race, and the so-called genius is either the man or the woman who gets there first or, and it’s only by a few minutes or, more often has better PR.
Marian Tupy: And yet, when you look at polls, I read a paper some time ago showing that only a share of population in single digits, maybe like 3% or 4% of people in Japan, in the UK, in the United States, report ever to have innovated anything, changing anything. In other words, if innovativeness is common to all humanity, very few people actually innovate something that has any kind of impact on the welfare of human beings. So, maybe we are all blessed with being able to innovate, but only very few of us actually succeed. So is there something more to a successful innovator than just the propensity to innovate, which you believe is a human characteristic?
Terence Kealey: Well, there are two answers to that question. First of all, people actually are more innovative just by adapting new technologies than they recognize. Just adapting, just learning how to use an iPhone, where before you used to write a letter, is actually a form of innovation, because you’re part of a community of innovators. And if you look across to the whole of society, we are constantly changing everything all the time. And we know that consumers actually share the innovation, because you get feedback from consumers. Steve Jobs, for example, defeated the Swedish company, whose name I’ve temporarily forgotten, because he listened particularly to consumers who were telling him that they no longer wanted faster connections, they wanted broader connections. They wanted a computer on their iPhone rather than a better telephone. So, consumers are part of that process of general innovation. But yes, of course, it is absolutely true that there are institutions that are dedicated to innovation and that some people are more innovative than others.
Terence Kealey: So I would argue, for example, and I’m absolutely not being sexist here, I’m just describing the most obvious example, that you can see that every generation of young women adopt different fashions from the previous generation. In fact, on a yearly basis fashions change in all sorts of things, clothes and shoes. This is a collective innovation. So no particular young woman may feel that she is part of fashion other than as a consumer. But in fact, by consuming and adapting to new fashion, she’s actually part of a community. Having said all that, it is of course true that certain people are particularly good at invention and innovation, just as certain people, like Alexander the Great or Napoleon, are particularly good at being generals. In every area of life, in playing sport, some people are better than others, and so yes, there are some people who are better at the various skills required of invention and innovation, and they would then be attracted to the innovative company or the innovative university. But actually, all humans in the West are part of innovative cultures, even though it’s led generally by a very small number of people, and that’s fine.
Marian Tupy: That’s fascinating. The argument that people often make about the necessity for government intervention in innovation, invention is, look at all the wonderful things that we got as a by-product of government spending, such as, the internet is a perfect example of that. Is it possible to quantify the cost benefit of government spending on R&D, because just… It’s a question of probability. If you throw a trillion dollars at something, something will stick, and eventually it will produce a… Will move humanity forward. Now, that’s not actually an argument in favor of government spending because if that money could have been left in the pockets of the corporations or individuals, they could have used it differently and accomplished much more with it. But that argument is difficult to explain when somebody says, “Ah, but we got internet from the government.” So what would be a good answer to that?
Terence Kealey: Well, that’s the Mariana Mazzucato position at the moment, and it is a completely false argument. And the best way of that is to look at ARPA or DARPA depending on which phase it’s going through in its life. This is the institution that everyone says, Advanced Research Projects Administration, that’s meant to have given us the internet and all sorts of other very good things. ARPA or DARPA has one consistent policy when it comes to cost benefit analysis: It will not cooperate or collaborate with anyone seeking to do a cost benefit analysis on itself, ever. It’s one of its blanket rules, and that tells you all you need to know. And the reason for that is the phenomena of crowding out. As it happens, Martin Ricketts and I have just had a paper accepted by Research Policy, which is the leading journal in this field, where we have mathematically modeled crowding out.
Terence Kealey: But essentially this is what happens. There are relatively few good scientists. I mean, you pointed out that only 2% or 3% of people really claim to be leading innovators. And that’s absolutely true, but I want to come back to that because it’s a very interesting point. But let us say that of all scientists, and they themselves are a subset of humanity, within the whole community of science, only 2% or 3% of scientists are outstanding. And this is of course not surprising. How many painters are as good as Picasso? How many composers are as good as Mozart? How many writers are as good as Jane Austen? These are minorities within minorities. But if the government starts funding science, it always does it on the scientists’ terms, ’cause this is what peer review is about. So the government gives money to the scientific community and then the scientific community distributes the money to its peers.
Terence Kealey: Well, who will it give it money to? It’ll give the money to Einsteins, not Joe Bloggs down the road. It’ll give all the money to the Einsteins, that tiny minority of really good scientists. So where do they all go? They all go to the universities, what we can call ivory towers, which means that industry is left with the second-rate scientists. And by the way, you can see that it’s clear, obviously there are individual exceptions, but unquestionably, the best scientists go to universities and then the not so good scientists end up in industry. And that’s absolutely damaging, because it means that industry hasn’t got access to the top researchers it needs to make the discoveries it would like to make. Of course, if you pour… This is your argument. If you pour trillions of dollars into research, something’s going to come out of it. But ARPA will not allow you to do a cost benefit analysis because it knows, it’s almost certainly done it privately, that the money it spends is less effective in terms of technology than that given to the private… Than if the private sector hadn’t had all this crowding out of scientists.
Terence Kealey: Let me just come back… And this is why, by the way, rates of economic growth never go up when governments fund science. But let me come back to this business of innovation ’cause it’s very, very interesting about the 2% or 3%. The point I’m trying to make that we are all innovators. I think we’d all agree that the least innovative human beings on the planet are accountants, and even less innovative than accountants are actuaries. And yet, before the advance of public science, you actually had the actuarial profession making great discoveries, such as high blood pressure gives you strokes or smoking gives you cancer. You have all these discoveries that the actuaries made just by looking at the raw data. This was long before epidemiology was invented. So even these least original of people come up with these great discoveries. High blood pressure kills. Nobody knew until the actuaries discovered that.
Terence Kealey: So this is the point I’m trying to make that we’re all part of a creative community. But to come back to the Mariana Mazzucato argument, of course, if governments receive trillions of dollars for research, they will produce something. But by so doing, they have pulled out of industry the best scientists and therefore they are not doing work that is in society’s benefit, because industry of course is always trying to produce goods that are valuable to people. They are in fact, simply in an ivory tower, working purely for their own interests and therefore industry, by being robbed of the best scientists, under-invests in science, ’cause it’s not getting anything for its money. And therefore we are not seeing stimulation of the economic growth.
Marian Tupy: Yeah. But also presumably the money that the government spends on R&D must come from somewhere, and to the extent that corporations could pay lower taxes and could keep more profits to reinvest in their own R&D, but have to hand it over to the government, that presumably too will have some effect in terms of how much companies spend on R&D. So let’s conclude with China. Terence Kealey doesn’t believe that China is going to overtake the United States and dominate everything. Why not?
Terence Kealey: Well, this fear of China… I hate to sound conspiratorial, but this fear of China is a nonsense. I mean, Chinese GDP per capita is a quarter or a sixth, depending on which parameter you choose, of America’s. This is a very poor country. Of course, in total, it’s as rich as America, but per capita, it’s really very, very poor still. And by the way, as we’ve all seen in the last few weeks, the Chinese communist party has realized what we’ve all realized, which is the problem with free markets and the problem with innovative societies is that people become empowered and they start asking questions, and they start asking questions of the government. And what we’ve seen in the last few weeks, just the last few weeks in China, is a huge crushing by the communist party of markets in education and technology and other hugely important, innovatory areas of the economy. The Chinese communist party can’t live with it.
Terence Kealey: China is not a threat to America in terms of overtaking the American economy. It’s simply not going to do it. It may be a military threat, it may be a geopolitical threat, but the idea that the Chinese system of no democracy and just the government directing the market in some sorts of, well, direction in the market, that that is going to work any better than it did in Russia is simply not true. The dogma is actually true. The richer people become and the more healthy and brisk markets become, the more people find military dictatorship intolerable. And the Chinese communist party has got a dilemma on its hands. It’s either going to be poor and therefore maintain a very… [chuckle] A controlled society or it’s going to allow society to be free, and in the end, the capitalists will destroy the communist party. They will never be able to get out of that irreducible conflict.
Marian Tupy: What is amazing to me is, how short human memory is. During the Cold War, when there was a competition between the USSR and the United States, a lot of academics argued we have to, in America, we have to become more like the USSR precisely for the reasons that you were mentioning, Sputnik and all of that. Look how many scientists per million population the USSR are producing, as opposed to us. Look how much money they are spending on R&D and so forth. And yet what proved to be crucial, really, to the success of the United States for the winning of the Cold War is that this was a centrally planned economy where completely, where people who didn’t know anything couldn’t know anything because no person is that smart, were able to move around industries and people like pieces on a chess board, and were able to send money, direct capital towards things which turn out to be unproductive and so forth.
Marian Tupy: In other words, what won the Cold War was the fact that the Soviet System of central control, having just one or two people in power who made decisions as opposed to the market where order is spontaneous rather than directed. So that’s what won the Cold War. And yet here we are just 40 years after the collapse, no, 30 years after the collapse of the Soviet Union, having the same argument, why is China so successful? Oh, well, because, it’s a centrally driven society and Xi can order highways to be built and great railways to be built. In fact, I wouldn’t want to be in Xi’s shoes, because he’s going to be responsible for all the mistakes that the Chinese are making now, and will be making in the future.
Terence Kealey: Well, I wouldn’t worry about him, because he’s also changed the rules. So he’s now president for life. But the important thing to remember is vested interest. The reason nobody is skeptical about these arguments, is it’s in everybody’s interests that governments should do this in the West. So it’s not just, of course, government funding of research, it’s also that the government trying to plan the economy, but just look at the government funding of research. The scientists love it, because it means lots of money for them. But the industrialists love it. They believe, rightly or wrongly, that if they can get the government to fund R&D they’re getting something back for their taxes, just as if someone came up with a clever argument by which they could persuade the government to fund their advertising or marketing or HR budgets, they would.
Terence Kealey: But unfortunately Ken Arrow hasn’t got round to that yet, but it’s just as cynical as that. Governments love funding science because the budgets are relatively modest, but then they can claim all the credit. In the year 2000, who stood up on the podium and said, look, we’ve cloned the human genome.
Marian Tupy: Bill Clinton.
Terence Kealey: It was Bill Clinton.
[laughter]
Marian Tupy: Yeah, yeah.
Terence Kealey: Somehow Bill was there with his pipettes. So governments take huge credit for it. And so, all vested interests are aligned, and so it is with the idea of a centrally planned economy. There are companies like Halliburton, which used to be Brown & Root. You’ve only got to look at Caro’s biographies of Lyndon Johnson to realize there are entire industries, this is what Eisenhower was saying, that exist only because of government funding. And these industries have a huge lobbying capacity to ensure that that government regulation of the market continues. It’s only the occasional libertarian, such as us at the Cato Institute, that stand up against these massive vested interests. But our voices are very small compared to these huge interests. It’s very sad.
Marian Tupy: Yeah. I look at all those, what, 70 or 80 empty cities that the Chinese have built.
[chuckle]
Marian Tupy: Cities, not buildings, cities that they have built. In fact, Bloomberg had a fascinating graphic yesterday, which showed that there are more empty apartments in China than the population of Germany.
[laughter]
Marian Tupy: You know? And so you wonder, underneath this shining cover, surface, what’s underneath in the Chinese economy, what’s going on? Where are the deep, deep flaws? Where has the rot taken place? Where are the bubbles as a result of capital misallocation? And when is it going to come to a crashing end?
Terence Kealey: Look, anyone who believes in industrial policy is an idiot. Or they have a vested interest because they’re going to get sums of money from the government. The Chinese economic model is no threat to humanity. However, the Chinese military model, now that is a threat ’cause it’s there’s an enormous country. May not be very rich, but in total, it’s very rich. If you were to tell me, is China a threat, a military threat to Taiwan? I would say, absolutely it obviously is. Is China going to invade Taiwan? I don’t know, but might it? Absolutely it might. And that’s where China is the threat. It’s not the economic model, it is the geopolitical threat. And we mustn’t mix those two up.
Marian Tupy: So with that, Terence Kealey, thank you very much for spending an hour with me. It was absolutely fascinating. And I hope to get to see you in person at some point in the future, in the near future.
Terence Kealey: Do you mean we’re going to be allowed to travel again? I can’t believe it.
[chuckle]
Marian Tupy: When we are given freedom to travel. Yes.
Terence Kealey: Thank you very much. Thank you, I loved it.