Science as a Public Good

Session 5 · Tue Sep 15

Why do markets tend to underprovide basic research, and which institutions help societies capture its wider benefits?

A warning from 1898

On the evening of September 7, 1898, Sir William Crookes walked onto a stage in Bristol and told an audience of thousands of scientists that Europe was going to run out of food.

The problem was nitrogen. Crops need it to grow. Until the late nineteenth century, the world’s supply came mainly from guano deposits on Pacific islands and saltpeter mines in Chile, both finite, both nearly exhausted. Crookes had done the arithmetic. At current rates of population growth and nitrogen consumption, he calculated, the wheat supply would collapse sometime after 1931. “England and all civilized nations,” he warned, “stand in deadly peril.”

Then he said something unexpected. He did not call for population controls or rationing. He called for chemistry. Nitrogen makes up 78 percent of the atmosphere, he pointed out. If someone could find a way to fix atmospheric nitrogen into a form that plants could use, the crisis would be averted. He was describing, without knowing it, a problem that would define the next half-century of industrial chemistry.

Over the next fifteen years, scientists and firms pursued several routes to nitrogen fixation. Fritz Haber developed a workable laboratory-scale ammonia process at the Technical University of Karlsruhe. Carl Bosch and a large BASF team then solved the different problems of catalysts, high-pressure equipment, materials, and factory-scale production. BASF’s first ammonia plant began operating in 1913. The result became one of the most important industrial processes in the world.

Here is the question this session is about: why did solving the nitrogen problem require both scientific knowledge and industrial capability—and what does that combination reveal about science as a public good?

The Haber–Bosch story is not a simple victory of government over markets, or markets over government. It is a story about different stages of innovation. University research helped establish knowledge that others could build on; a private firm supplied the capital, engineering, and production knowledge needed to turn a laboratory result into fertilizer at scale. The combination matters because basic knowledge and commercial application create different benefits and different incentives.

To understand why, we need to look more carefully at what kind of thing scientific knowledge is.

Spend five minutes on the Crookes story before revealing the division of labor between Haber and Bosch. Put two columns on the board—“knowledge” and “scale”—and ask what kind of institution is well placed to supply each. Return to the columns after the public-goods framework.

Connection to Crawford’s “Solutionism” (Module 5 reading): Crookes is the archetype of what Crawford calls a solutionist — pessimistic about the problem, optimistic about the solution. Worth flagging briefly.

What kind of thing is knowledge?

Consider two objects. The first is a bag of nitrogen fertilizer. If you spread it on your field, your neighbor cannot spread that same fertilizer on theirs. Economists say fertilizer is rival: one person’s use reduces what is available for others.

Now consider the chemical knowledge behind ammonia synthesis. Haber’s use of that knowledge did not leave less for Bosch or for later chemists. Knowledge is nonrival.

Knowledge is also often nonexcludable. Once a discovery is published—and the norms of science strongly encourage publication—it is difficult to stop others from building on it. Patents and secrecy can make some applied knowledge excludable, but fundamental results are usually harder to contain.

Together, these features make scientific knowledge a public good: nonrival and nonexcludable. And this creates a fundamental economic problem.

If you cannot capture the full benefits of producing something, you will tend to produce too little of it.

This is Nelson’s central mechanism. Basic research is especially prone to underinvestment because the gap between its private return and its social return can be large. Firms may still fund research when patents, secrecy, complementary assets, or first-mover advantages let them capture enough of the benefit. The theory predicts underprovision, not zero private research.

Haber–Bosch joined university chemistry to private industrial engineering. Which parts of the process created benefits BASF could capture, and which parts created spillovers for other researchers, firms, farmers, and consumers?

Which of the following best explains why markets underinvest in basic research?

  1. Basic research is too cheap to be profitable.
  2. Firms cannot produce scientific knowledge.
  3. The social return to research exceeds the private return — benefits spill over to those who did not fund the work.
  4. Scientists have no incentive to do research.

Avoid presenting Haber–Bosch as a clean public-versus-private test. Its teaching value is the division of labor: scientific findings can spill over widely, while applied research, specialized equipment, and production know-how may be easier for a firm to appropriate. Nelson’s prediction is underinvestment in basic research relative to its social value, not the absence of industrial research.

What institutions filled the gap?

If markets underprovide basic research, two kinds of institutions have historically filled the gap: public funding and scientific norms.

The public funding story in the United States traces directly to Vannevar Bush’s 1945 report, Science, The Endless Frontier. Bush had overseen American wartime science (radar, the Manhattan Project, penicillin production) and had seen what organized scientific effort could do. Writing to President Truman in July 1945, he made a simple argument: the same logic that justified wartime investment in science applied in peacetime. The benefits of basic research, in health, security, and economic growth, were so large and so diffuse that private actors could never capture enough of them to justify the investment. Government had to step in.

Bush’s report became a central blueprint for the National Science Foundation, created in 1950 after five years of political debate. During the same postwar period, the federal research system also expanded through agencies including the National Institutes of Health. Government funding of investigator-led research carried out mainly at universities became a defining feature of American science.

But public funding alone doesn’t explain how science works. Scientific research is not centrally planned. No government agency decides what questions chemists or physicists should ask. So how does a decentralized system of researchers, scattered across thousands of institutions, manage to produce cumulative, reliable knowledge?

The answer, as Nelson (1959) emphasizes, lies in the norms of open science: results are published, methods are disclosed, priority goes to whoever publishes first. These norms look strange from an economic perspective (why would you give away your discoveries?), but they make sense once you see them as a collective solution to the public goods problem. Because scientists compete for priority and recognition rather than for secrecy, they have strong incentives to disclose. And because they disclose, knowledge accumulates. Each generation of researchers can build on what came before without having to rediscover it.

Bush’s model — government funds basic research; private firms develop applications — has been called the “linear model” of innovation. But is it accurate? Can you think of cases where the relationship between basic research and application ran in the opposite direction, where commercial pressure drove fundamental discoveries rather than following from them?

This is a great discussion for setting up the DARPA session later. DARPA explicitly rejects the linear model — it starts from a desired capability and funds the science needed to get there. The contrast is: Bush’s NSF model = investigator-driven (researchers ask their own questions); DARPA model = mission-driven (define the goal, fund the path).

Key institutional timeline for class: - Bush report: July 1945 - NSF founded: May 10, 1950 (five years of congressional wrangling — Bush wanted civilian control, Congress wanted political oversight) - NIH expanded: 1946–48 - DARPA (as ARPA): February 1958, response to Sputnik — a fundamentally different model

How much do societies spend on research?

The chart below shows total research and development expenditure as a share of GDP. It combines public and private spending on basic research, applied research, and experimental development. That makes it useful for comparing the overall scale of national research systems, but it cannot by itself tell us whether a country is solving Nelson’s public-goods problem.

Source: UNESCO UIS, via the World Bank and Our World in Data. Spending includes public and private current and capital expenditures on basic research, applied research, and experimental development. Requires an internet connection to render.

Draw out two things: (1) countries devote very different shares of national output to research; (2) the public/private mix and the basic/applied mix matter as much as the total. A country can report high R&D spending while directing little of it toward basic research. The chart is context, not a direct test of Nelson’s argument.

Connections

Builds on: Session 4 showed how innovation rents can motivate firms to search for better products and processes. Session 5 examines the limit of that mechanism: when knowledge spills over, the social return can exceed the return any one firm can capture.

Sets up: Session 6 asks what happens once societies build research systems and still discover that each new idea may be harder to find. The DARPA session in Module 4 later asks whether mission-driven science does better than the Bush model.

Arc note: This session is the economic foundation for two later arguments: science-policy choices have large, long-run consequences, and a market failure is a problem of institutional design rather than a reason for despair. Students should leave able to distinguish the case for public support of basic knowledge from the role firms play in applied research and scale-up.

Vannevar Bush submitted his report Science, The Endless Frontier to President Truman in 1945. Which institution did his report most directly lead to creating?

  1. DARPA (Defense Advanced Research Projects Agency)
  2. The National Institutes of Health (NIH)
  3. The National Science Foundation (NSF)
  4. The Manhattan Project

According to Nelson (1959), why do scientific norms encourage researchers to publish their findings rather than keep them secret?

  1. Publishing maximises the researcher's private profit from the discovery.
  2. It allows other scientists to check the work for errors.
  3. The norm of priority — recognition goes to whoever publishes first — gives researchers an incentive to disclose rather than hoard.
  4. Publication is legally required for research receiving public funding.

Review cards

Work through these cards now, then Orbit will schedule them for review over the coming weeks. Studies show that spaced retrieval practice produces dramatically better long-term retention than re-reading.

Reading guide

Required

Nelson, Richard R. “The Simple Economics of Basic Scientific Research.” Journal of Political Economy 67, no. 3 (1959): 297–306.

What to look for: Nelson makes a tight economic argument in ten pages. Track the logical structure: (1) basic research produces knowledge; (2) knowledge has public good properties; (3) therefore markets underprovide it; (4) therefore universities and government fill the gap. Does each step hold?

Key argument: The social returns to basic research systematically exceed private returns because knowledge is nonexcludable — competitors benefit whether or not they paid for the research.

Prepare to discuss: Nelson was writing in 1959, a year after Sputnik and during the height of Cold War science funding. Does his argument depend on that context — or is it timeless?

Bush, Vannevar. Science, The Endless Frontier (1945). Transmittal letter + Chapter 3, “Science and the Public Welfare” (9 pp.). Free at nsf.gov

What to look for: Bush is making a policy argument to a president, not a theoretical argument to economists. Notice how he grounds the case for public funding in concrete wartime examples before pivoting to peacetime. What does he assume about how science works?

Key argument: The benefits of basic research are so broad and so unpredictable that no private actor can capture enough of them to justify the investment — government must act as the funder of last resort.

Prepare to discuss: Bush says the government should fund science but scientists should choose the questions. Is that the right division of labor? Who should decide what gets studied?