Underestimating long-term consequences of cryptoanarchy

[Declan McCullagh]

On Fri, May 16, 2003 at 10:55:50AM -0700, Tim May wrote:
> -- public choice analysis (who benefits?)
> -- market distortions (markets are ignored)
> -- rent-seeking (control of resources means continuing rent); 
> shakedowns, governments banning competition for its monopolies
> -- central planning (inefficient allocation)
> -- laws no longer connected to morality, but to rent-seeking (gov't. 
> running gambling)
> -- a general inattention to market, as politicians are not spending 
> their own money (hence bad investments in urban renewal, factory 
> subsidies, highways, railroads, etc.)--their own money is not at risk.

All that is right, of course, and very concise. I guess I'm inefficient
because I wrote a piece recently that used many more words to say
the same thing. :) See below. It's on nanotech pork barreling and
public choice.

-Declan

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   The best case for a government subsidy of R&D is to fund vital
   research that the private sector would fail to do on its own.
   Proponents of government nanotech funding argue that, as in other
   "basic research" areas, corporations have only short-term profit
   horizons. They say that government must pay for basic research because
   that's not profitable--only applied research is.
   This point has some validity, but there are three counter-arguments.
   First, private sources will pay for basic research. It may not be at
   the level that all researchers would prefer, but if it can lead to
   applied research results, the private sector will still do some of it.
   Second, nanotechnology includes a mix of early-stage research and
   late-stage research.  Third, by having private funders, you avoid
   the public choice problems.
   Real-world subsidies rarely, if ever, follow the ideal found in
   economics textbooks. Instead, government-funded R&D in the real world
   is subject to the lobbying and rent-seeking that takes place whenever
   government dangles money. As the nascent world of nanotechnology
   develops, we have a chance to see how the political process steers
   research in political ways that need not parallel scientific goals.
   Bureaucrats, special interest groups, and members of Congress have
   strong incentives to channel nanotech funds to politically popular
   recipients or into trendy research areas that may or may not have
   legitimate scientific value. This has already lent itself to
   pork-barrel politics, as illustrated by a March 2002 speech by House
   Science Committee Chairman Sherwood Boehlert (R-NY) delivered in New
   York City. In it, Boehlert pledged to steer a disproportionate amount
   of cash to businesses and universities in his home state. "I will do
   everything in my power to ensure that nanotechnology research gets the
   funding it deserves," Boehlert said. "I will do everything possible to
   see that a significant portion of that research takes place right here
   in New York state."
   Without the traditional yardstick of profit and loss, there is no
   straightforward way to measure what is a wise course of spending.
   Rational economic calculations tend to be replaced by the routine of a
   guaranteed budget increase every year. Money often goes to favored or
   well-connected groups, and controversial but promising research may be
   ignored. Replacing market decisions with ones made on Capitol Hill
   could lead to highly-politicized results and inefficient allocation of
   nanotech funds.

   ...

   It's too early to predict what might happen in the case of
   nanotechnology, but early signals indicate Congress is eager to tie
   strings to funding. A bill introduced by Sen. Ron Wyden (D-Or.) would
   "ensure that philosophical, ethical, and other societal concerns will
   be considered alongside the development of nanotechnology." Last week,
   a House committee added an amendment to a nanotech funding bill that
   would require an evaluation of the racial diversity of organizations
   applying for nano-funding. During a presentation last year at a
   Foresight Institute conference, a former national security advisor for
   Vice President Al Gore predicted increased control. "These guys
   talking here act as though the government is not part of their lives,"
   said Leon Fuerth, now a professor of international affairs at George
   Washington University. "They may wish it weren't, but it is. As we
   approach the issues they debated here today, they had better believe
   that those issues will be debated by the whole country."
   Among groups that benefit from nanotech spending, we're starting to
   see a lot of unhealthy jockeying for position and rent-seeking going
   on. Rent seeking is obtaining wealth or power through government
   action. In general, it grants special interests short-term gains at
   the expense of the long-term economic health of a society.
   To bolster its rent-seeking abilities, the Nanobusiness Alliance trade
   group signed up former House Speaker Newt Gingrich as its chairman and
   Rep. Robert Walker, former House Science committee chairman, and
   former Transportation Secretary Rodney Slater as advisors.
   Corporations that hand over up to $25,000 a year to the alliance can
   be part of all "legislative tours at no charge" and receive "free
   access to legislative" lists of key members of Congress and their
   aides. Alliance members include both startups and the billion-dollar
   firms Lockheed Martin, Agfa, Gateway, and GE.
   If these CEOs viewed nanotech research as too risky to fund
   themselves, there might be more justification for government dollars.
   Instead, private investment is flourishing. According to a statement
   from the Nanobusiness Alliance: "Some of the world's largest
   companies, including IBM, Motorola, Hewlett Packard, Lucent, Hitachi,
   Mitsubishi, NEC, Corning, Dow Chemical and 3M have launched
   significant nanotech initiatives through their own venture capital
   funds or as a direct result of their own R&D."
   A venture capital company devoted exclusively to nanotech, Lux
   Capital, already exists. Lux Capital estimates that from 1995 to 2000,
   the number of news articles referencing nanotechnology jumped sixfold,
   and a billion dollars of venture capital flowed into the nanotech
   industry last year. A recent report from the firm said companies "are
   increasingly conducting pure or basic research to keep competitive...
   Private spending on pure research is supposed to surpass public
   spending in the next year. Other firms turn to partnerships with
   academia, essentially outsourcing R&D initiatives."
   Evidently, basic research in the case of nanotechnology can be funded
   privately. While a firm may not be able to capitalize on all the
   benefits of basic research it pays for itself, CEOs seem to believe
   that a sufficient understanding of the fundamentals leads to
   applications that can be profitable.

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