Information and research as public services
I have been giving examples of public goods and services, which by their nature are underprovided by individuals and business enterprises. So far, I've primarily discussed tangibles-- networks of roads, railways and telecommunication, public sanitation, things like those. Established law, law enforcement, public health, education-- those are less solidly material.
And now I'd like to move more thoroughly into intangible territory, but start with the very solid example of groceries.
Not so very long ago, late in the 19th century, grocery store chains had not been invented. What you had, if you lived in a town of when you went into one, was a local grocery store. And that local grocer depended on making a profit, selling flour, coffee, cornmeal and such from barrels, pickles from barrels, and so on. "...storekeepers on the frontier quickly discovered that it was profitable to `stretch' their inventories. It was not uncommon for a pound of flour purchased in a general store to be half plaster. Cornmeal was `plumped' with sawdust. Coffee might contain dyed navy beans, dry-roasted peas, or even small pebbles."
Some adulterants were even poisonous.
Interestingly, three solutions to what non-grocers regarded as this problem developed: grocery and grocery store brands, the field of home economics, and eventually the Food and Drug Administration.
More about those this week, hockey permitting.
Source of quote about adulterated food.
--
One entrepreneurial innovation that arose out of this situation of limited consumer knowledge was branded production of foodstuffs, and branded grocery store chains. (There had been patented and branded fodstuffs earlier, but those tended to embody trade secrets and be products intended as special aids to health.)
By putting an enduring name on products, these market solutions to non-evident food adulteration promised consumers the ability to abandon the brand should it fail to deliver unadulterated foodstuffs. But since adulteration was still not readily available to the consumer, the guarantee of reputation-on-the-line had itself to be trusted, by most consumers. And as now, branded products required monitored and consistent supply lines and tended to be more expensive than traditionally non-branded groceries.
If you could accept the guarantee-by-reputation, and pay any premium for branded products, you could avoid adulterated groceries.
--
Yesterday I talked about the innovations of branded food products and chain groceries as solutions to the problem of asymmetric information in local groceries: the sources and condition of many groceries are not readily apparent, and grocers had and have profit incentives to sell unreliable cheaper goods, and to adulterate goods themselves.
Those are costly solutions. All solutions to problems of asymmetric information are costly.* It's pay up or have plaster-choked flour, so to speak, all over.
In the case of branded groceries and markets, information costs are undertaken by brand and chain, and those costs are shared by consumers.**
Another solution to the problem was innovated by scientific-minded women who could not get hired as professionals in the then-existing system***: the creation of hone economics as a field. They envisioned the modern housewife with a small laboratory for analyzing foodstuffs brought into the household, which would certainly establish who it is who would "call" the food brands and grocery chains on adulterated or otherwise unsavory products.
Just think of it. Household upon household investing in home labs in order to determine the safety of food products they bought.
Because each household analyst's information would belong to her for the benefit of her family. Why should she share?
And so there would be socially-inefficiently replicated investment in analytical capital, house by house.
Now, you may have noticed that instead householders could form a Food Analysis Club, contribute to the purchase of shared equipment, even share the information they extracted from analysis. Or some of these household scientists might form companies and sell analytical services. If on a piecemeal basis, you've still got inefficiencies. But they could also publish a newsletter of information/warnings, for others to subscribe to.
Neither of those things happened in any dominant form. Because in 1906 the FDA was formed, under the presidency of President Theodore Roosevelt, who acted on a mandate to curb the abuses of corporations, among other things. I'll talk about the FDA next.
--
I am talking about asymmetric information in the context of solutions from the market, on individual bases and those of voluntary association, and public-- that is, government-provided-- service. I am talking about this in the context of adulterated food, a commercial commonplace of the second half of the nineteenth century and the early twentieth century.
No solution is costless where the information is not immediately transparent. We're not talking about "Is this an apple or a beefsteak" here. We're talking about "What animal did this meat come from, in what health?" and "Is this flour full of plaster?"
I have talked about branded groceries and grocery chains as costly market solutions-- the reputation they risk is their ante, but who's going to call them on inferior products?
When I talked about the innovation of the home labs of early home economics, that gave information on who might detect quality deviation, and opened up the possibilities of home economics clubs or testing firms to sell analytical information.
These solutions require trust, and some of them require high and reiterated individual investment in lab equipment, where one lab's results could serve many.
All of them offer some testing and guarantee service only to those who can and will pay a premium for it. Even for them, it was "test every time." For those who couldn't afford or wouldn't pay for the information, it was "Well, I felt ill after that meal. I guess I can go complain or switch grocery."
Instead, in the early twentieth century the federal government elected by US voters decided that US residents as a class should be safe from adulterated food. They set up the FDA and 1906. There, a professional civil service monitored food and drug products for adulteration and for effectiveness. They not only made the information they found available to the general public at only the cost of enquiring and reading. They also used legal clout to remove adulterated goods from the market, keep toxic or ineffective patented medicines off the market, and use fines to give producers an incentive to keep clean and honest.
This is regulation.
It is certainly an inconvenience to any given producer. It is a benefit to producers as a group, since it raises public trust in their products, as an industry.
It is certainly possible to make standards captious or wrong-headed, for agents of the FDA to take bribes, and so on.
But I think there were extremely good reasons to found the FDA at taxpayer expense, and that the maintenance of food and drug standards and information is a valuable public service underprovided by markets.
--
Last week I was talking about the monitoring and enforcement of food standards as a public service-- of the cost of information and different ways of providing it and who then has access to it-- individual, voluntary association, market-provided, and public.
Information production and access to it are major areas with public service aspects-- that is, low cost of transmission, one person's access not increasing costs to others to access, and benefits that increase more than additively as more people have access to the information.
It's a funny area, with different solutions to different sorts of issues.
One instance is scientific and technical innovation. An individual or firm has profit incentives to create a superior product or methodology-- but if it's superior, the general public would benefit from it! How are the desirability of incentives and of as-free-as-possible propagation of knowledge to be balanced?
In the United States, as in many nations, they are balanced by a patent system. A patented innovation gives the patent-holder(s) the legal right to exclude others from use of the knowledge if they don't contract with the patent-holder. This ownership yields "rents" to the patent-holder(s)- extra payments to them for their ownership as such and not for proudction. But that protection expires after a fixed period of time so other producers and the general public can benefit.
And of course, as part of the legal property rights system, the patent system substitutes for private instutions involving extortion and enforcement by commercial or physical pressure, and is a public service.
--
On Wednesday I wrote about the seesaw between incentives to innovation through private profit, and the social benefits of public innovation, and the US patent system as an approach to balancing them.
Today I wanted to write about what sorts of research and innovation individuals and corporations feel motivated to engage in.
Now as for individuals-- we humans are wildly disparate, wildly creative, motivated in all sorts of ways. Some seek individual profit, some seek pure knowledge, some seek hilarity or beauty (on scales varying from 4chan to DaVinci), some seek to benefit society in accordance with our understanding of benefit. So we can be moved to research and innovate for all sorts of purposes-- on typically very limited resource bases.
But behold! Individual researchers can be resourced by deeper pocketed firms! However, incorporated firms are nearly always motivated by profit. That is, by what they expect will profit them. Setting aside issues of the time horizon of planning, that generally limits corporate-paid research to narrowly tailored programs.
It has even led to corporate funding to produce particular results, as for instance cigarette companies investing in research to cast doubt on the link between tobacco use and cancers.
It is of course possible for owners of a closely-held corporation or even of a publicly-held (dispersed shares) company to fund basic research. Roger Babson's prize for research in gravity is still given most years-- he was pretty sure someone would invent anti-grav.
But I wouldn't want to depend on the generosity or whims of individual- or corporate-funding for basic research.
--
I've been writing about what individual and corporate research is systematically good for-- mostly applied work that builds on core theory, which is expected to profit the research investor in usually a fairly short time period.
The first foundations of that core theory were laid by the work of dedicated and relatively well-heeled amateurs, and it is very proper to celebrate them. And yet it is well to recognize how many centuries the accumulation of those basics took.
Individuals are more to be generous and long-sighted in their research interests than are firms, but less well-heeled. Governments have the capacity to outdo both, and are designed to serve a public interest. (Even kleptocracies have to function well enough to stave off coups and revolutions.)
Governments are better-suited and more likely than individuals and firms to invest in research on very large projects, projects with long time horizons, projects with no obvious immediate payoff, projects with payoffs that are hard for individuals or firms to capture as profit****, projects with very uncertain outcomes, projects for which human cooperation is a particularly valuable input.
That constitutes a great many research projects that individuals and firms are unlikely to invest in.
----
I've been writing about public goods and services, because I think their existence tends to be assumed away, and the many that make our daily lives viable tend to be forgotten. I had been writing about the pretty myopic incentives individuals and firms generally have to invest in research, as compared with governments.
And I ran into what I quote below, which is so relevant that I decided to post it. The source is a Vanity Fair article. Those who very much want to eliminate the Department of Energy and those who very much admire President Trump's administration will probably not like the article, and I recomment against your clicking through. Those interested in learning more about the DoE should click through and read the long, rich article.
"The $70 billion loan program that John MacWilliams had been hired to evaluate was a case in point. It had been authorized by Congress in 2005 to lend money, at very low interest rates, to businesses so that they might develop game-changing energy technologies. The idea that the private sector under-invests in energy innovation is part of the origin story of the D.O.E. `The basic problem is that there is no constituency for an energy program,' James Schlesinger, the first secretary of energy, said as he left the job. `There are many constituencies opposed.' Existing energy businesses-oil companies, utilities-are obviously hostile to government-sponsored competition. At the same time they are essentially commodity businesses, without a lot of fat in them. The stock market does not reward even big oil companies for research and development that will take decades to pay off. And the sort of research that might lead to huge changes in energy production often doesn’t pay off for decades. Plus it requires a lot of expensive science: discovering a new kind of battery or a new way of capturing solar energy is not like creating a new app. ...'
"John MacWilliams had enjoyed success in the free market that the employees of the Heritage Foundation might only fantasize about, but he had a far less Panglossian view of its inner workings. `Government has always played a major role in innovation,' he said. `All the way back to the founding of the country. Early-stage innovation in most industries would not have been possible without government support in a variety of ways, and it’s especially true in energy. So the notion that we are just going to privatize early-stage innovation is ridiculous. Other countries are outspending us in R&D, and we are going to pay a price.'
"Politically, the loan program had been nothing but downside. No one had paid any attention to its successes, and its one failure-Solyndra-had allowed the right-wing friends of Big Oil to bang on relentlessly about government waste and fraud and stupidity. A single bad loan had turned a valuable program into a political liability. As he dug into the portfolio MacWilliams feared it might contain other Solyndras. It didn’t, but what he did find still disturbed him. The D.O.E. had built a loan portfolio that, as MacWilliams put it, `JPMorgan would have been happy to own.' The whole point was to take big risks the market would not take, and they were making money! `We weren’t taking nearly enough risk,' said MacWilliams. The fear of losses that might in turn be twisted into anti-government propaganda was threatening the mission...."
----Public security as public service bonus below-------
"In his [security] briefings on the electrical grid MacWilliams made a specific point and a more general one. The specific point was that we don’t actually have a national grid. Our electricity is supplied by a patchwork of not terribly innovative or imaginatively managed regional utilities. The federal government offers the only hope of a coordinated, intelligent response to threats to the system: there is no private-sector mechanism. To that end the D.O.E. had begun to gather the executives of the utility companies, to educate them about the threats they face. `They all sort of said, "But is this really real?"’ said MacWilliams. `You get them security clearance for a day and tell them about the attacks and all of a sudden you see their eyes go really wide.'"
* Economists often assume perfect, meaning free, information, which reduces the complexity of models that aren't primarily about costly or asymmetric information. It's something to be alert for in reading results.
** Non-economists frequently think that production costs are paid entirely by producers or entirely by consumers. In general they are shared. I will spend more time on this when we finally talk about supply and demand.
*** Is this the sort of thing that's meant by "free markets"? I've never known.
****True public service research
Facebook posts incorporated:
Groceries: a study in private, semi-private, and social solution to a problem of ignorance - 1
Brands as a market solution to problems of imperfect information and adverse incentives - 2
Home economics and the home lab as solutions to food adulteration
The FDA: A public solution to food and drug company producer and purveyor private information
Innovation, incentives, and the patent system
Individually- and corporate-funded research-- resources and motivations
Government investment in basic research
The US Department of Energy as a font of public service research and as a national security agency
And now I'd like to move more thoroughly into intangible territory, but start with the very solid example of groceries.
Not so very long ago, late in the 19th century, grocery store chains had not been invented. What you had, if you lived in a town of when you went into one, was a local grocery store. And that local grocer depended on making a profit, selling flour, coffee, cornmeal and such from barrels, pickles from barrels, and so on. "...storekeepers on the frontier quickly discovered that it was profitable to `stretch' their inventories. It was not uncommon for a pound of flour purchased in a general store to be half plaster. Cornmeal was `plumped' with sawdust. Coffee might contain dyed navy beans, dry-roasted peas, or even small pebbles."
Some adulterants were even poisonous.
Interestingly, three solutions to what non-grocers regarded as this problem developed: grocery and grocery store brands, the field of home economics, and eventually the Food and Drug Administration.
More about those this week, hockey permitting.
Source of quote about adulterated food.
--
One entrepreneurial innovation that arose out of this situation of limited consumer knowledge was branded production of foodstuffs, and branded grocery store chains. (There had been patented and branded fodstuffs earlier, but those tended to embody trade secrets and be products intended as special aids to health.)
By putting an enduring name on products, these market solutions to non-evident food adulteration promised consumers the ability to abandon the brand should it fail to deliver unadulterated foodstuffs. But since adulteration was still not readily available to the consumer, the guarantee of reputation-on-the-line had itself to be trusted, by most consumers. And as now, branded products required monitored and consistent supply lines and tended to be more expensive than traditionally non-branded groceries.
If you could accept the guarantee-by-reputation, and pay any premium for branded products, you could avoid adulterated groceries.
--
Yesterday I talked about the innovations of branded food products and chain groceries as solutions to the problem of asymmetric information in local groceries: the sources and condition of many groceries are not readily apparent, and grocers had and have profit incentives to sell unreliable cheaper goods, and to adulterate goods themselves.
Those are costly solutions. All solutions to problems of asymmetric information are costly.* It's pay up or have plaster-choked flour, so to speak, all over.
In the case of branded groceries and markets, information costs are undertaken by brand and chain, and those costs are shared by consumers.**
Another solution to the problem was innovated by scientific-minded women who could not get hired as professionals in the then-existing system***: the creation of hone economics as a field. They envisioned the modern housewife with a small laboratory for analyzing foodstuffs brought into the household, which would certainly establish who it is who would "call" the food brands and grocery chains on adulterated or otherwise unsavory products.
Just think of it. Household upon household investing in home labs in order to determine the safety of food products they bought.
Because each household analyst's information would belong to her for the benefit of her family. Why should she share?
And so there would be socially-inefficiently replicated investment in analytical capital, house by house.
Now, you may have noticed that instead householders could form a Food Analysis Club, contribute to the purchase of shared equipment, even share the information they extracted from analysis. Or some of these household scientists might form companies and sell analytical services. If on a piecemeal basis, you've still got inefficiencies. But they could also publish a newsletter of information/warnings, for others to subscribe to.
Neither of those things happened in any dominant form. Because in 1906 the FDA was formed, under the presidency of President Theodore Roosevelt, who acted on a mandate to curb the abuses of corporations, among other things. I'll talk about the FDA next.
--
I am talking about asymmetric information in the context of solutions from the market, on individual bases and those of voluntary association, and public-- that is, government-provided-- service. I am talking about this in the context of adulterated food, a commercial commonplace of the second half of the nineteenth century and the early twentieth century.
No solution is costless where the information is not immediately transparent. We're not talking about "Is this an apple or a beefsteak" here. We're talking about "What animal did this meat come from, in what health?" and "Is this flour full of plaster?"
I have talked about branded groceries and grocery chains as costly market solutions-- the reputation they risk is their ante, but who's going to call them on inferior products?
When I talked about the innovation of the home labs of early home economics, that gave information on who might detect quality deviation, and opened up the possibilities of home economics clubs or testing firms to sell analytical information.
These solutions require trust, and some of them require high and reiterated individual investment in lab equipment, where one lab's results could serve many.
All of them offer some testing and guarantee service only to those who can and will pay a premium for it. Even for them, it was "test every time." For those who couldn't afford or wouldn't pay for the information, it was "Well, I felt ill after that meal. I guess I can go complain or switch grocery."
Instead, in the early twentieth century the federal government elected by US voters decided that US residents as a class should be safe from adulterated food. They set up the FDA and 1906. There, a professional civil service monitored food and drug products for adulteration and for effectiveness. They not only made the information they found available to the general public at only the cost of enquiring and reading. They also used legal clout to remove adulterated goods from the market, keep toxic or ineffective patented medicines off the market, and use fines to give producers an incentive to keep clean and honest.
This is regulation.
It is certainly an inconvenience to any given producer. It is a benefit to producers as a group, since it raises public trust in their products, as an industry.
It is certainly possible to make standards captious or wrong-headed, for agents of the FDA to take bribes, and so on.
But I think there were extremely good reasons to found the FDA at taxpayer expense, and that the maintenance of food and drug standards and information is a valuable public service underprovided by markets.
--
Last week I was talking about the monitoring and enforcement of food standards as a public service-- of the cost of information and different ways of providing it and who then has access to it-- individual, voluntary association, market-provided, and public.
Information production and access to it are major areas with public service aspects-- that is, low cost of transmission, one person's access not increasing costs to others to access, and benefits that increase more than additively as more people have access to the information.
It's a funny area, with different solutions to different sorts of issues.
One instance is scientific and technical innovation. An individual or firm has profit incentives to create a superior product or methodology-- but if it's superior, the general public would benefit from it! How are the desirability of incentives and of as-free-as-possible propagation of knowledge to be balanced?
In the United States, as in many nations, they are balanced by a patent system. A patented innovation gives the patent-holder(s) the legal right to exclude others from use of the knowledge if they don't contract with the patent-holder. This ownership yields "rents" to the patent-holder(s)- extra payments to them for their ownership as such and not for proudction. But that protection expires after a fixed period of time so other producers and the general public can benefit.
And of course, as part of the legal property rights system, the patent system substitutes for private instutions involving extortion and enforcement by commercial or physical pressure, and is a public service.
--
On Wednesday I wrote about the seesaw between incentives to innovation through private profit, and the social benefits of public innovation, and the US patent system as an approach to balancing them.
Today I wanted to write about what sorts of research and innovation individuals and corporations feel motivated to engage in.
Now as for individuals-- we humans are wildly disparate, wildly creative, motivated in all sorts of ways. Some seek individual profit, some seek pure knowledge, some seek hilarity or beauty (on scales varying from 4chan to DaVinci), some seek to benefit society in accordance with our understanding of benefit. So we can be moved to research and innovate for all sorts of purposes-- on typically very limited resource bases.
But behold! Individual researchers can be resourced by deeper pocketed firms! However, incorporated firms are nearly always motivated by profit. That is, by what they expect will profit them. Setting aside issues of the time horizon of planning, that generally limits corporate-paid research to narrowly tailored programs.
It has even led to corporate funding to produce particular results, as for instance cigarette companies investing in research to cast doubt on the link between tobacco use and cancers.
It is of course possible for owners of a closely-held corporation or even of a publicly-held (dispersed shares) company to fund basic research. Roger Babson's prize for research in gravity is still given most years-- he was pretty sure someone would invent anti-grav.
But I wouldn't want to depend on the generosity or whims of individual- or corporate-funding for basic research.
--
I've been writing about what individual and corporate research is systematically good for-- mostly applied work that builds on core theory, which is expected to profit the research investor in usually a fairly short time period.
The first foundations of that core theory were laid by the work of dedicated and relatively well-heeled amateurs, and it is very proper to celebrate them. And yet it is well to recognize how many centuries the accumulation of those basics took.
Individuals are more to be generous and long-sighted in their research interests than are firms, but less well-heeled. Governments have the capacity to outdo both, and are designed to serve a public interest. (Even kleptocracies have to function well enough to stave off coups and revolutions.)
Governments are better-suited and more likely than individuals and firms to invest in research on very large projects, projects with long time horizons, projects with no obvious immediate payoff, projects with payoffs that are hard for individuals or firms to capture as profit****, projects with very uncertain outcomes, projects for which human cooperation is a particularly valuable input.
That constitutes a great many research projects that individuals and firms are unlikely to invest in.
----
I've been writing about public goods and services, because I think their existence tends to be assumed away, and the many that make our daily lives viable tend to be forgotten. I had been writing about the pretty myopic incentives individuals and firms generally have to invest in research, as compared with governments.
And I ran into what I quote below, which is so relevant that I decided to post it. The source is a Vanity Fair article. Those who very much want to eliminate the Department of Energy and those who very much admire President Trump's administration will probably not like the article, and I recomment against your clicking through. Those interested in learning more about the DoE should click through and read the long, rich article.
"The $70 billion loan program that John MacWilliams had been hired to evaluate was a case in point. It had been authorized by Congress in 2005 to lend money, at very low interest rates, to businesses so that they might develop game-changing energy technologies. The idea that the private sector under-invests in energy innovation is part of the origin story of the D.O.E. `The basic problem is that there is no constituency for an energy program,' James Schlesinger, the first secretary of energy, said as he left the job. `There are many constituencies opposed.' Existing energy businesses-oil companies, utilities-are obviously hostile to government-sponsored competition. At the same time they are essentially commodity businesses, without a lot of fat in them. The stock market does not reward even big oil companies for research and development that will take decades to pay off. And the sort of research that might lead to huge changes in energy production often doesn’t pay off for decades. Plus it requires a lot of expensive science: discovering a new kind of battery or a new way of capturing solar energy is not like creating a new app. ...'
"John MacWilliams had enjoyed success in the free market that the employees of the Heritage Foundation might only fantasize about, but he had a far less Panglossian view of its inner workings. `Government has always played a major role in innovation,' he said. `All the way back to the founding of the country. Early-stage innovation in most industries would not have been possible without government support in a variety of ways, and it’s especially true in energy. So the notion that we are just going to privatize early-stage innovation is ridiculous. Other countries are outspending us in R&D, and we are going to pay a price.'
"Politically, the loan program had been nothing but downside. No one had paid any attention to its successes, and its one failure-Solyndra-had allowed the right-wing friends of Big Oil to bang on relentlessly about government waste and fraud and stupidity. A single bad loan had turned a valuable program into a political liability. As he dug into the portfolio MacWilliams feared it might contain other Solyndras. It didn’t, but what he did find still disturbed him. The D.O.E. had built a loan portfolio that, as MacWilliams put it, `JPMorgan would have been happy to own.' The whole point was to take big risks the market would not take, and they were making money! `We weren’t taking nearly enough risk,' said MacWilliams. The fear of losses that might in turn be twisted into anti-government propaganda was threatening the mission...."
----Public security as public service bonus below-------
"In his [security] briefings on the electrical grid MacWilliams made a specific point and a more general one. The specific point was that we don’t actually have a national grid. Our electricity is supplied by a patchwork of not terribly innovative or imaginatively managed regional utilities. The federal government offers the only hope of a coordinated, intelligent response to threats to the system: there is no private-sector mechanism. To that end the D.O.E. had begun to gather the executives of the utility companies, to educate them about the threats they face. `They all sort of said, "But is this really real?"’ said MacWilliams. `You get them security clearance for a day and tell them about the attacks and all of a sudden you see their eyes go really wide.'"
* Economists often assume perfect, meaning free, information, which reduces the complexity of models that aren't primarily about costly or asymmetric information. It's something to be alert for in reading results.
** Non-economists frequently think that production costs are paid entirely by producers or entirely by consumers. In general they are shared. I will spend more time on this when we finally talk about supply and demand.
*** Is this the sort of thing that's meant by "free markets"? I've never known.
****True public service research
Facebook posts incorporated:
Groceries: a study in private, semi-private, and social solution to a problem of ignorance - 1
Brands as a market solution to problems of imperfect information and adverse incentives - 2
Home economics and the home lab as solutions to food adulteration
The FDA: A public solution to food and drug company producer and purveyor private information
Innovation, incentives, and the patent system
Individually- and corporate-funded research-- resources and motivations
Government investment in basic research
The US Department of Energy as a font of public service research and as a national security agency