Industrial policy and science policy

The October 1-7 issue of The Economist featured a look at the consequences of industrial policy…national efforts to influence the amount and makeup of the goods and services produced. Lots of material, but here’s a taste.

The write-up referenced an interesting article by Daron Acemoglu (MIT), Philippe Aghion (Harvard), Leonardo Bursztyn (UCLA), a David Hemous (Harvard), which models the impact of policy on technology advance. You can find the article, entitled The Environment and Directed Technical Change, set for publication in the American Economic Review, here.

The abstract:

“This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses “dirty” machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.”

According to The Economist article, the theoretical model shows that if a product is made using two substitutable inputs, one of which is “dirtier” but also cheaper than the other, then the market will not only tend to generate too much pollution but also produce a self-reinforcing cycle of innovation in the dirty product as researchers build on previous breakthroughs. To solve these problems, it helps to have two instruments to hand: a carbon tax to discourage pollution directly, and subsidies or other incentives to encourage innovation around the cleaner input.”

Both articles are worth the read.

And aren’t both likely relevant to science policy as well? If industrial policies favoring a dirty product foster innovation in that dirty product, then mightn’t national science policies favoring the physical sciences over the natural sciences, say, foster breakthroughs in the former as opposed to the latter, and tend to sustain or promote continued investment in that initially favored science over an extended period of years? And wouldn’t the same also hold for investment policies favoring the natural sciences over the social sciences?

Surely finding and nurturing a diversity of sciences and the right balance across those disciplines must be a priority for nations attempting to cope with complex, urgent issues ranging from public health to education to living sustainably on an Earth of limited, fragile resources and violent extremes.

This brings to mind two questions.

1.       How well are we doing?

Hard to say precisely. But here are some realities to ponder. We have succeeded in creating particle accelerators of such power that we can now mimic reactions that took place in the first 10-40th of a second of the universe or so…but we still have only the vaguest of ideas regarding the effect of climate change on the tracks, intensity, duration, and size of hurricanes we can expect in the future. Second, we are far better at predicting hurricane tracks than predicting human behavior in the path of such hurricanes, or coastal vulnerability to their effects. Maybe the one class of problems is more difficult than the next…or maybe the other class of problems has simply received less disciplined attention.

2.       How might we do better?

Again hard to know. But here’s some good news. Our worldwide investments in Earth observations, science, and services are so small that we can afford to double them, virtually willy-nilly, for a few years and see if we like the results. And a similar statement would apply to the relevant social sciences. Be a bit discerning in how we distribute this support, and the payoff might be extraordinary indeed.

Why pick a doubling? Why not a higher or a lower figure? Seems pretty arbitrary at first glance. To some extent it is. But any less, and the change in our knowledge and understanding might be rather subtle, difficult to measure. Any more, and chances are good we won’t be able to spend the investment wisely.

Rather clumsy argument here. Surely you can do better. Your thoughts?


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2 Responses to Industrial policy and science policy

  1. While you’re dreaming, how about dreaming about a body politic that prioritizes and balances ALL government spending, not just that for science, and does it on a rational basis? After all, that’s really what is needed – science’s fair share has to be balanced against entitlements, national security and a host of other things. Our biggest problem in government is that we prioritize our spending based on donations and influence – what’s best for the country is something of an afterthought.

    I think you should also look at the model’s assumptions a little further, as well. It’s not as easy to apply in practice as in theory. Who says when there is a substitutable input? What’s the differential threshold between cost and “good?” It also appears that the social cost is ignored. I sure wish that the carbon taxers/GHG limiters who so often use the precautionary principle would apply it in this case. We should not embark on this kind of journey until we are sure that we are not doing more harm than good. In this case, the environmental good we are trying to obtain has a very real social impact that seems to be ignored by the carbon crusaders. Whether we like it or not, the working poor – the ones who can least afford it – are the ones who would feel the most pain with any of the taxation or regulatory schemes I’ve seen proposed so far. The CO2 reduction method that likely does the least harm to them is to either offer incentives for more efficient use of fossil fuels or to reduce or eliminate incentives for inefficient uses. This too must be considered when we talk of balancing our portfolio.

    • Many thanks, John. You make good points. To start… the kind of analysis that the authors provided could be targeted more broadly, and…in any ultimate sense should be. Your subsequent discussion about the model assumptions also rings true. Models are more a reflection of thought process than they are holy writ. They’ll give us back the answer we were seeking when we constructed the model. And it’s pretty clear what answer those folks were seeking.

      Policymakers should take note, but so too should our own community. We could really use a lot more introspection about where allocations for science and the distribution of funding for science are taking us.

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