By James Pethokoukis and Benjamin F. Jones

Is federal funding for research and development a critical investment in future economic growth and technological progress or just another example of wasteful government spending? And what mix of basic science and applied research produces the greatest returns? In this episode, Benjamin F. Jones discusses the benefits of science and innovation, the policies that can leverage these engines of prosperity, and the challenges we face.

Ben is a professor of Entrepreneurship and Strategy at Northwestern University as well as the faculty director of the Kellogg Innovation and Entrepreneurship Initiative. This summer he authored “Science and Innovation: The Under-Fueled Engine of Prosperity.”

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: In the paper, you say the US invests about 3 percent of GDP in R&D. Is that a lot, in the post-war era, a little — where does that rank?

Jones: It’s really about
the same. For the most part, the US is quite consistent, like other countries,
in how much they invest — what share of our total resources we invest in a
given year in research and development.

The composition of it has
shifted in an important way, which is to say that the private sector makes up
an increasingly large portion of that 3 percent. And public investment, which
really supports science in particular, makes up a declining share. And, in
fact, the public support portion is now at its lowest level in about the last
70 years.

Does that composition, how it’s divvied up between public and private,
matter?

It matters in the sense that what a lot of the public money is doing is science, and what a lot of the private money is doing is application and the creation of specific goods and services. And those are, of course, complements. You can think of the science as opening up new doorways, and then the private sector is walking through those doorways and making applications from the new knowledge that’s been generated.

The fact that we’re doing
less science as a share of our resources is, I think, concerning because it’s
something that’s opening up many fewer doorways and, therefore, not creating as
many opportunities. We’re not giving as many opportunities to the private
sector, in a sense, for them to make use of.

Why doesn’t government invest in R&D the way it used to?

I think the answer is
probably salience to the public. The public, and I think I would include
policymakers, don’t fully understand the value of these investments to our
future potential and progress. And I think the first thing actually is not so
much that the public share has declined; it’s that 3 percent isn’t a whole lot
to start with. The evidence is that, whether it’s from the private sector or
science and investments, these are extraordinarily high-return investments to
society.

And of course, the stakes
are, in some sense, obvious. We know it’s important. It drives what? It drives
higher standards of living, better products and services, more productive
workers who get paid more and compete better on the world’s stage. It improves
our health, and it makes our lives longer. It makes our lives healthier. And of
course, it’s very important to national security as well. It’s a big puzzle as
to why we only do 3 percent in the first place, given that the evidence seems
to suggest that it is so valuable.

To the more specific
question you asked, I think that our public interest waxes and wanes. I think
it probably becomes more salient in moments of fear and with a sense of
competition internationally. So the Sputnik moment was a moment that sparked
the Apollo program, a moment where the US suddenly feels behind. And not just
behind in general, but behind their Cold War adversary, the Soviet Union. So
then, there’s a huge increase in investment, and of course the Apollo program,
particularly in the space race.

Take a modern context:
Today, where there’s COVID, we have a very clear challenge. You get Operation
Warp Speed. Suddenly, the government is very invested in trying to solve that
challenge. I think the sense of China rising today is also something that is
pressing on Congress, effectively in many ways, to increase our investments in
this space. I think a sense of threat can make it more salient to the public.

But in some sense, the
deeper question is, why isn’t it more salient in general? Why are we investing
so little all the time? Even in Apollo moments, we’re not investing that much,
given the benefits that it seems to bring.

Walk me through the process of how we figure out how much we should
spend. I would guess that might begin by just looking at the returns to public
spending on R&D.

Let’s just start with a
high-level total number — that 3 percent. Evidence suggests that for every
dollar we put into the R&D machine, across the waterfront of R&D
policies and investments, on average that’s returning something like $5 or more
back in social value. In other words, put $1 in, you get $5 back. That’s an
amazing return. It’s an incredible return. If any of us had that machine
sitting on our desk, you could spend all day — put in 10, get back 50; put in
100, get back 500 — pretty good machine to have. So we seem to be just really
under-investing on the margin, compared to what we could be doing.

You could imagine
doubling it, 3 percent to 6 percent, and that could really elevate the growth
rate of the economy. It could not just elevate the growth rate, it could make
us live longer lives. We would solve problems like Alzheimer’s faster. We might
create clean energy technologies faster. There are all sorts of things that we
would do that would have lots of value.

In some ways, the harder
question actually is, what exactly would you invest in there? It’s harder in
the sense that, first of all, a lot of these policies interact. But also
because we have better information about certain kinds of policies than others.
We just don’t know about certain things. For example, when the National Science
Foundation invests in mathematics, what’s the benefit? It’s a little harder to
trace. You can tell lots of very clear stories where there are enormous
benefits. You don’t get cryptocurrency without mathematics. You don’t get the
mobile technology and GPS satellites without mathematics. All sorts of things.
But that’s a little further away from application, that sort of investment in
math. Whereas, when you look in the private sector, you can often see how an
additional dollar of R&D leads to something very concrete, right in front
of you.

But what I would tell
you, and we can go into this in much more detail if you’d like, is that when
you study these individual R&D policies, you tend to find over and over
again that they have very high returns themselves. A simple policy would be to
just expand our investment across the range of inputs into the R&D process,
which are very many.

Rather than focusing on whether we should spend it on this area or
that area, one of the debates is how much should be very basic research, raw
science, versus more applied. Does that matter in these calculations of return?

I think what we know is
that the returns look high in both cases. We don’t know which return is higher.
Nor are they necessarily separable, because applied research builds on the
basic research. But also, this actually may be more surprising to people, basic
research often builds on applied research. A lot of the really interesting
understandings we’ve developed of nature actually come from people solving very
particular applied work.

So for example, Louis Pasteur,
in the middle of the 19th century. We all know Louis Pasteur because we get
pasteurized milk when we get it from the grocery. He was someone who’s made a
lot of applied work in food spoilage and fermentation. But he’s also the person
who generated the germ theory of disease, which is one of the most basic
biomedical insights there is, and it unleashes much longer lives for all of us,
through antibiotics, vaccines, and other things that come later. But the idea
that these little microbes we couldn’t see are causing us to be ill was not
appreciated before Pasteur. He’s really connecting it to his applied work in
food spoilage.

To try to separate basic
research from applied research — in some ways, it’s a natural question. It’s a
hard question to answer because they interplay so clearly. What we’d probably
do best with is spreading our bets and doing more of both.

So one criticism of basic research I’ve heard is that we, meaning the
United States, will do the initial research, and then other countries take that
new knowledge and create their own industries. Is that something we should
worry about? Or, should we be doing more applied research and helping fund
domestic startups?

There are somewhat
contending imperatives in R&D. The question at some level is, do we just
want to get as good as we can ourselves, or is it really about how we rate
versus somebody else? In a health context, if we can live a longer life and we
can solve Alzheimer’s, we’re pretty happy. And we’re probably pretty happy if
people in Switzerland and South Africa also live longer lives and solve
Alzheimer’s. Whereas in a national security context, it might seem like you
need to be ahead. I think that in particular is where that concern might raise
itself more acutely.

But I would say that
basic research is done by people, and very sophisticated people who are very
specialized and have very deep understandings of certain kinds of phenomena,
from physics and chemistry, to medicine, to computer science, to anything else.
And when you do the basic research and you invest in the basic research, you’re
not just investing in the creation of ideas — you’re investing in creating the
people in your country who are the best world masters of those ideas and are
the ones who are going to be able to fully understand them, and also use them
and take them to the next level. That human capital component, the people part,
is much stickier. It’s in the country you invest in. Those people aren’t going
to the other countries.

I think, in a sense, the
way you hold onto the advantage of basic research is largely because you’re
investing in the people in your country, who are in fact doing it, and then
have this leg-up advantage. One way to see that, of course, is: Why do we see
clustering of innovative activity on the map? Why is it in the US so much? Why
is it in Silicon Valley? Why do you see a lot of biomedical research in
Cambridge, Massachusetts? It’s because that’s where the people are, and they
cluster with all these different specialties. That becomes a very sticky and
self-fulfilling investment.

I think, yes, it will be
the case that basic research will spill over, to some extent, to other
countries. In many ways, that’s a good thing because other people can benefit.
But in terms of keeping ahead, that human capital piece is a key part of why
you do keep ahead through those investments.

Well, we can create those people in this country or we can bring those
people in from other countries. How are we doing in both those areas?

It’s a mixed scorecard.
The US does, obviously, very well at higher-level education in research
institutions. People from all over the world want to come and study in those
institutions.

If you look at our
domestic pipeline, in terms of our K–12 education, we seem to do very poorly
compared to many other countries. Recent evidence suggests that our systems in
the United States create what we might call “lost Einsteins,” which is to say
we see lots of kids who are great at math, say in third grade, and have the
kind of technical capacities that you would think would lead them in very
strong, inventive and entrepreneurial STEM careers, but they don’t get on that
pathway. It could be related to their household income or their gender, their
ethnic group or racial group. So we seem to have a lot of talent that doesn’t
migrate well through the K–12 system in the US — so we’re foreclosing the
pipeline of talent, to some extent. I think that’s a great place for the US to
be trying to do reform and investing, to create that. It’s a matter of not just
overall success of the nation; it’s all a matter of individual opportunity, as
well, for all these kids. I think it very much goes to the American Dream.

The other side, of
course, is importing talent through immigration policy. This is, of course, an
area where the US, for a long time, gained enormously. If you look at who does
a lot of the great research in the United States, who does a lot of the
invention and the patenting, who starts a lot of the great companies, the
answer is surprisingly often people born outside the US who move to the US. So
immigrants, for a long time, have played an outsized role in our scientific,
inventive, and entrepreneurial system and helped make the US the most effective
innovation system in the world. That’s been a strength.

But of course, for a
whole bunch of reasons, we have a lot of conflict over immigration policy in
the United States and we’ve been stymied for any kind of major immigration
reform for some time. I think there’s a lot of dimensions to the types of
immigration and what’s going on there, but certainly in terms of foreclosing
access to our system and being able to draw in the best and the brightest
around the world to participate, not just in scientific research but
participate in the United States, is really damaging our long-run prospects as
a nation that will lead in the world.

We’ve had Nick Bloom on here, talking about his work on how game-changing ideas are getting harder to find. And to find those, we need to put resources, including more researchers, into discovery. That seems hard, to keep finding more people to push the technological frontier. Is that a natural limitation on doing science? Or might AI become a super research assistant to complement those activities?

Things like AI will help;
it really depends on people. I don’t think we are actually limited in some
fundamental sense. Innovation may be getting harder and there’s lots of
evidence for that, but again, the US is putting less and less public dollars
into R&D.

It’s interesting. What do
we think drives productivity and the long-run growth rate of the United States?
It’s learning new and better ways of doing things. It’s making us more
productive and that really comes back to R&D. If we have a productivity
growth slowdown, which we seem to have this century, and then we look and we
say, “Oh, the government is not investing as much of the share of GDP as
it used to. It’s half of what we did in 1980.” Well, maybe we should do a
lot more there. It’s scaling funding into R&D.

But of course, to answer
your question as well, it’s not just scaling resources in a financial sense. It’s
scaling the people pipeline. I think we have lots of talented people who are
not going into this space, and there are certainly lots of people abroad who,
traditionally, are very eager to come to the United States and participate but
cannot do so because of visa category limitations.

I wish science policy was just about coming up with a number. It would
be a lot easier to analyze. But it seems like it gets very messy trying to
figure out if we need to be doing something and making those changes, as far as
the actual practice of science.

Yeah, the practice is
quite complex, obviously, and there are effectively many government
institutions that are involved. The biggest: We all talk about the NIH, the
National Science Foundation, and the Department of Energy. The Department of
Defense is actually the biggest funder, and on from there. And they have very
different kinds of grant systems — ways of reviewing, length of grants, amounts
of grants. We have a whole rich array of public policy. There are also a lot of
philanthropists who are increasingly in the game of funding science in their
own, rather idiosyncratic ways.

But, if you were to boil
it down for me, I would say that I think diversity of approaches is really key.
I think that there’s, if not systematic evidence but compelling storytelling
evidence that suggests that we herd too much into a smaller set of discovery
pathways. And the reason you want diversity is because, first of all, nobody
has a crystal ball. If we knew what was going to happen when you started an
R&D project, we wouldn’t have to do it. The whole point is that we’re going
into the unknown. We’re basically stumbling around in the dark, looking for a
light switch and trying to flip it on. And we’re going to miss. We’re going to
fail. The best people, Nobel Prize winners, all fail a lot, then they have a
big breakthrough because it’s fundamentally uncertain.

And partly because of
that, you should be very skeptical when someone tells you, “I know that
this is the thing we should be doing.” Because nobody knows that that’s
the thing we should be doing. We have better guesses and we have worse guesses,
but you can never be overconfident. And so, in that sense, spread your bet.
You’d be very surprised where some of the big insights come from and the
spillovers that come and just go in unexpected directions.

A classic example of that
would be extremophile bacteria. There are two biologists from the University of
Indiana who go out to Yellowstone National Park, a famous American monument.
And they’re asking a very basic question about life, which is whether life can
exist in really extreme environments. And so they’re looking at hot springs — Old
Faithful, etc. They find, in fact, that there are these bacteria that actually
live in boiling water. Amazing. Who knew life could survive in those conditions?
Okay, that’s just a really curious, interesting discovery about the nature of
life.

But it turns out that
that very bacterium that they discovered has an enzyme in it which later would
prove, in a completely unexpected way, to be absolutely essential to being able
to replicate DNA at scale in a laboratory. Basically, the entire biotechnology
industry in all of its forms, coming even out of COVID vaccines and COVID
testing, all the PCR tests — that process which is the essential tool of
replicating genes depends on that very bacterium and one particular enzyme in
that bacterium. Without that, we wouldn’t be able to do any of these things.

Science is going to open
up entire new industries in ways that we cannot expect. And most of it won’t.
Most of it is going to be people stumbling around in those hot springs and they
come back up: “There’s nothing here.” Or they find something but it’s not
applied any time soon. But you really don’t know where these big insights are
going to come from, so we really need to spread our bets and not pretend that
we have a crystal ball.

When entrepreneurs try something and fail, they’re still celebrated
for their risk-taking. But with government, we don’t seem to have nearly as
much tolerance for failure. If we want to expand government research funding,
will Americans have to become more tolerant of the failures that naturally come
with bleeding-edge research?

I agree. Solyndra, of
course, is the common example people like to throw around of a government
investment misfire. But this is why I go back to salience: People often don’t
see the benefits directly.

The story I just told
you, where biotechnology comes from, most people don’t know. They don’t
understand that that depended on science. They don’t understand that Uber
actually depends directly on Albert Einstein, and that Albert Einstein’s insights
depended directly on a 19th-century map from a person named Bernard Riemann,
because it’s so technical. These are very technical things that spillovers
happen in unexpected and slow ways. So the public does not really appreciate
that.

And then they see
failure, to your point, and they’re like, “Ah, we wasted taxpayer
dollars.” So a couple of points. First of all, venture capitalists waste
money all the time, because they know they don’t have a crystal ball. They
spread their bets and they’re looking for the big thing, and they miss most of
the time. That’s the private sector; that’s not the public sector. For every 10
drugs large pharmaceutical firms try, going into a phase one trial, only one is
going to actually become an approved product. They fail all the time, and
that’s a private sector firm. They’re making the best bets they can possibly
make with their own money and they’re failing all the time. And that’s okay,
because that is the nature of R&D. We have to get into a mindset where we
allow for failure and that we expect failure.

And I can tell you one comforting thing. If you look to the public, they may think, “Oh, science is useless, most of it’s totally useless.” If you take every patent issued in the United States (this is a study that I did with a co-author), and you look to see what kind of science they build on — do they reference specific science or not? — you actually find that the vast majority of all scientific articles will flow through eventually into some patent. Maybe not directly, maybe not cited directly by a patent, but a science article is built on by another science article, and then that one is cited by a patent. There’s a process where basic flows towards applied and flows into the actual marketplace inventions that become goods and services in front of people.

We see enormous
connectivity. This kind of idea that there’s an ivory tower and science is
doing things that are not relevant to the public and it’s not valuable — that
is not what we see. It’s not what we see in the macro when we look at the
returns to the investment. It’s not what we see in the micro when we look down
to every particular scientific article and we look at what use it actually has.
We find an enormous range and a rich range of use. Often it’s hard to trace;
you have to actually go and trace it, but it’s there. We need the public to
come to an orientation where they don’t expect to understand every detail — this
is science — and don’t demand that you’re going to succeed when it’s impossible
because there’s going to be failure and you need to fail. And the public needs
to recognize that the stakes here are so high for our standard of living, our
workforce, our health, our national security, that we can just go and make
these investments that drive those things.

When people hear about what’s happening in science, many of them worry
about AI, and robots, and biotechnologies. Some people think we’re progressing
too quickly and we can’t control these technologies that we’re creating. How do
you respond to those fears?

Well, they’re very
interesting questions. If you go back to life before the Industrial Revolution
and before the Enlightenment, say, humans made very, very little progress for
almost all of human history. On net, averaging across all the things we’ve
figured out in science and technology, do we live a better life today than we
did when we only lived to age 35? Your children were likely to die by age five
most of the time and you were a farmer with very few tools, working very long
hours all the time, and struggling with nutrition and starvation much of the
time. That’s one world.

Now, that’s not to say
that certain technologies might not be problematic, and I think we do produce
problematic technologies. You can debate which ones are and which ones aren’t.
There’s a double-edged sword to a lot of these things. But I think when you
look and you step back, and you say, “Well, let’s look at human history
and the human experience,” you realize just that on net, the positives
that have come from this, historically at least, over a long history now, have
really been enormously positive.

When I look at a
technology that comes and that looks potentially problematic — which I might do
with things like echo chambers in social media (it seems like a problematic
aspect of the internet), and there are problematic applications of certain
things in the context of weapons of mass destruction, there’s AI, and they have
complex and problematic properties in some forms, if not in others — I think
the answer to these things: If technology creates a new problem, the answer to
that is going to be actually a new technology, a new insight that’s going to
solve that problem.

So a different way to
think about what science and technology do, in strictly applied applications,
we’re trying to solve problems. We have a problem. We don’t know how to solve
it. People die of cancer. People get Alzheimer’s disease. Everyone is not very
productive on a farm. You’re identifying a problem, and you’re trying to come
up with a better solution to that problem. Science and technology can sound
esoteric, but that’s what we’re doing all the time and that’s this inventive
people, creative aspect.

If technology does good
things, like the internet does a lot of great things, maybe it does some
problematic things. Okay, so what are those problems? Figure out what those
problems are, and let’s try to solve them. That might call in some regulation,
and that could be very useful, some government, institutional ideas as
innovations, but it also can call in new technologies that can try to solve
those problems. New companies that don’t have some of these flaws. These kinds
of things. I think if you looked at the scope of human history, I’d want to bet
on more technology, not on less technology.

Over at my blog and newsletter, I’ve written about the long bet between Robert Gordon and Erik Brynjolfsson about whether we’ll see faster productivity growth over the rest of this decade. Where do you come down on that?

I’m a tech optimist in
the sense that I think there are all sorts of problems we know now that we
don’t know how to solve. You hear this generationally. They say, “Oh,
we’ve figured everything already out.” You heard this back in the
Industrial Revolution, at one point. You heard it about the early computers:
“Oh, we’ve done everything we could ever do with computers, there’s no
more application” — that was before the internet. You hear this kind of thing
all the time.

I think I look at the
world and I see all sorts of problems that we’d like to solve. I think just in
health alone, there are so many problems we haven’t solved. And we have many,
many uncertainties and doors to go through, and biology is producing radically
surprising insights into new tools all the time that are incredible. Space
travel, artificial intelligence, any number of deep understandings of nature
and reality that we still haven’t figured out. Physics is puzzling through very
deep questions. I see enormous opportunities for progress. So in that sense I’m
an optimist.

Now, I also think it is
getting harder. I think that we’ve plucked the low-hanging fruit first. One
thing I emphasize in my work is that there’s just so much we’ve already figured
out, that to be an expert now, you have to be very narrow at the frontier. So
your chance for having wide insights as individuals is very low. You take the
first airplane from the Wright Brothers, two people that are leading aeronauts
of their time, and then you go to a modern airframe from Boeing or Airbus and
we’re talking 30 different deep engineering disciplines just to design and
produce the engines. There’s an enormous amount of knowledge that goes into,
say, a modern technological version of something. So for one person to push
that frontier is increasingly challenging.

That may be why we have a
productivity growth slow down. It is getting harder. But I’m an optimist
because I think there’s so much more we can do and I think we will solve it.
This is where I come back to effort: We just have to try. We aren’t trying very
hard. That’s the reality. We’re not trying anywhere near as hard as we could. We’re
leaving a lot of talent out of the game; we’re not investing anywhere near what
we could — so most of the returns to that looked very, very high. So to me the
path is fairly clear.

To finish up, there’s a lot of interest in Washington about doing more
on R&D and there’s an ever-involving R&D plan moving its way through
Congress. What would be your policy advice on science and innovation investment
in R&D?

Well, the Endless
Frontiers Act and its evolution, I think, is going in the right direction so
I’m very positive about it. I think that the more we can do through the NSF,
the Department of Energy, or other ways, it will be to our collective benefit.
So I think it’s a great investment. When I look at the numbers they’re talking
about, I think it’s still very small compared to what could be done. And so I
think there’s always more to do. But nonetheless, I don’t want to let the perfect
be the enemy of the good and I’m encouraged that Congress is thinking in these
ways.

Whether you get there
from competition with China or some other motivation, it will be hugely
beneficial so I am very glad to see it.

My guest today has been Benjamin Jones. Ben, thanks for coming on the
podcast.

My pleasure. Thanks for having me.

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” Benjamin F. Jones is a professor of Entrepreneurship and Strategy at Northwestern University.

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