Should There be Profit in Knowledge?
Economists call goods that are non-rival and non-excludable “Public Goods.” Importantly, this category of goods challenges the neat formula which underpins our capitalist system: market equilibriums are established by simple supply and demand curves signaled by prices in the market. So how do you figure out market demand for a “Public Good?”

Economics & Innovation
Economics can be defined as the study of the allocation of scarce resources among people. It provides an explanation for which goods and services wind up in the hands of which people. Economics has thus traditionally thought about innovation as an allocation issue—how much resource should we allocate to innovation (as opposed to other ends) and what is the societal effect of these allocations?
Republic of Science
It has long been accepted that basic scientific research is an important precursor to technological innovation. And yet, throughout the early history of the United States, the prevailing doctrine of states' rights together with a general strain of populist anti-elitism kept the nation from realizing either Thomas Jefferson's vision of strong federal support for science through agriculture, or Alexander Hamilton's advocacy of government subsidies for the advancement of technologies to the benefit of industry.
And thus our allocations to innovation early in our history were modest at best.
Following World War I, scientists who had worked with the Chemical Warfare Service sought to establish an institute in the private sector to apply fundamental knowledge in chemistry to problems of medicine.
After eight years of unsuccessfully seeking a philanthropic patron or industry partner to endow such an institute, its proponents joined forces with U.S. Senator Joseph Ransdell of Louisiana to seek federal sponsorship for their efforts.
Following a protracted political campaign that lasted more than four additional years and crossed two presidential administrations, the Ransdell Act was passed in 1930 with support from President Hoover and Congress due largely to a then recent influenza crisis as well as a growing interest in cancer research.
The Ransdell Act achieved two things:
- The renaming of the Hygienic Laboratory as the National Institute of Health, and
- For the first time ever, the provision of government funding for basic biomedical research.

U.S. Senator Joseph Ransdell, D-Louisiana

The National Institute of Health (NIH) in Bethesda, Maryland, 1940
This legislation marked a sea-change in the attitude of both the U.S. political community and the scientific community toward the public funding of medical research. The change in attitude was so swift and profound that when the National Cancer Institute Act came up for a vote in 1937, it passed both houses of Congress unanimously.
In the period following World War II, science entered a kind of golden age, and was increasingly at the center of much of modern life—new medicines such as penicillin improved life; technologies such as radar and synthetic rubber led to trips to outer space and eventually the Moon thereby inspiring young minds.
And the explicit view that science and innovation were crucial to our society became embedded in an implicit social contract supporting science that was struck after the end of the war—the public will fund universities to do research, and the private sector will benefit from the dissemination of the results of this research.
This “deal” was famously set forth by Vannevar Bush. Bush had been the Dean of the School of Engineering at MIT, the founder of Raytheon, and then during and immediately following World War II, he directed the United States’ national R&D effort. In his well-known 1945 report, “Science, The Endless Frontier,” Bush argued successfully that the public needed to fund science and thus innovation because
This canonical answer to the question “why innovation?” has thus persisted since at least the end of World War II:
The public funding mechanism promoted by Bush came together with the normative structure of science to create what Michael Polanyi, a Hungarian-British scientist and 3 polymath, called “The Republic of Science:”
1
Note that from this very first funding authorization, though, scientists were in a position to complain about the under-allocation of resources to their pursuits— having sought $15 million in funding, only $750,000 was authorized.
2
E. R. Edelman, M. B. Leon, The fiber of modern society. Sci. Transl. Med. 3, 89cm14 (2011).

Vannevar Bush, 1940

The USDA's penicillin research team, 1944

Testing synthetic rubber, 1944
Public Goods
All of which was, of course, quite great.
Except that there is an odd quirk in economics that leads to a problem. The quirk involves goods such as basic scientific knowledge, clean air, public parks, national defense, and, most famously, as identified by the economist Ronald Coase, light from lighthouses.
What all these goods have in common is that they are:
a) Non-rival: one person consuming them does not stop another person consuming them, and
b) Non-excludable: if one person can consume them, it is impossible to stop another person from consuming them.
Economists call goods that are non-rival and non-excludable “Public Goods.” Importantly, this category of goods challenges the neat formula which underpins our capitalist system: market equilibriums are established by simple supply and demand curves signaled by prices in the market.
So how do you figure out market demand for a “Public Good?”
Let’s use Coase’s “Light from a Lighthouse” as our example of such a good.
If “Light from a Lighthouse” was a typical private good, then it would be rival (once you saw the light it would be gone and no one else could see it) and excludable (once you bought the light, you would own it, and could stop other people from seeing it).
Rivalry in consumption is what makes market pricing systems so incredibly effective, and why Adam Smith’s invisible hand hypothesis can work. A price is a per unit charge for a good (e.g., Light from a Lighthouse), such that, when goods are consumed away due to a rivalry between consumers, supply shortages will tend to correct the market by driving up prices as consumers compete for the few remaining goods. Similarly, a supply surplus will cause firms to lower the price of the good until an equilibrium is met that will clear the market.
Once a lighthouse has been built and its lamp turned on, though, its light becomes a Public Good—a thousand boats could sail by and see the light and it would not be used up, and all those boats could consume the light whether or not they had chipped in to build the lighthouse.
Since a Public Good can be shared in essence infinitely, no additional units of the good need to be produced following the first such unit to satisfy the demand of the market. For public goods then, market price is no longer an efficient mechanism to govern supply and demand because the stock of a public good is never “consumed away” and thus prices cannot adjust dynamically to control the ebb and flow of supply and demand.


Economics 101: Supply & Demand / How Efficient Markets work

The economic inefficiencies of public goods
Scientific Knowledge as a Public Good
Scientific knowledge is a particular type of Public Good (or at least many economists assume so).
When considering the case of scientific knowledge in particular as a “Public Good,” economists identify two additional characteristics that are important beyond being non-rival and non-excludable:
1. It is a durable good, that is it is not destroyed or altered by its use. Even better, the more it is used the more its value increases because the application of knowledge proves its validity and widens the scope of its applications (“network effect”).
2. The production of scientific knowledge is uncertain—in the most extreme cases it is impossible to predict either results or their usefulness.
In addition to the market failure described above, another form of market failure encumbers the production of basic scientific knowledge: transactional spill-over.
What happens if you try to trade basic scientific knowledge in an open market?—
A rational buyer of a piece of scientific knowledge, just like a rational buyer of a car or a stock, would first want to know something about what it is that they will be getting for their money.
If deal falls through, the potential buyer gains some knowledge about the idea—this is known by economists as a “transactional spill-over.”
Findings of scientific research being new knowledge would be seriously undervalued were they sold through a perfectly competitive market because either the seller reveals too little about the idea (to protect against spill-over), and the buyer thus undervalues it; or, the seller reveals too much about the idea, and the buyer has not need to pay for it at all.
So, again, markets fail to property account for scientific knowledge as finding the optimal balance between disclosure and non-disclosure is very difficult.
Markets for Public Goods fail for a third reason. Consider:
- Merck funds basic research and publishes results.
- Pfizer does not fund basic research, but reads Merck’s results.
- Because it did not spend money on the basic research, Pfizer has more money available to commercialize (profit from) the research it did not fund.
- Pfizer’s stock price goes up, Merck’s goes down.
- Merck stops funding basic research.
- Society has a problem …
The lack of incentive for individuals or firms to contribute to a Public Good is known as a free-rider problem. The term refers to the individuals / organizations who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production thereby taking a “free-ride” on the contributions of others. There are two key aspects of the free rider problem:
First, the individual incentive to contribute to a Public Good is reduced by the contributions of others, and thus individual contributions tend to be smaller when the group is larger. Put another way, the size of the free-rider problem grows as a community grows larger.
Second, as the community grows larger, the optimal size of the Public Good grows. The market failure under voluntary contributions is greater the larger is the community.
The combination of the characteristics of non-rivalry and non-excludability means that it can be hard to get people to pay to consume Public Goods, so they will be underproduced, or perhaps may not be produced at all if left to simple market forces.
As a means of allocation "Public Goods", markets tend to fail.
Economic Solution: Subsidies
There are a variety of ways that we can seek to correct the market failure and support the production of Public Goods.
Private philanthropy is one common category of subsidization. But two forms of government intervention are perhaps the most consequential levers.
The most direct form of government intervention is through the use of public resources (i.e., tax revenues) to close the gap between what the private market will fund and what is perceived to be socially optimal. Viewed in this way, the NIH and NSF budgets are tax-funded subsidies for the creation of scientific knowledge.
The other major form of government intervention is the one mentioned by the U.S. Constitution—the creation of a system by which a “Public Good” can be transformed into a private good (rival, excludable) by the granting of a patent.
Patents allow exclusive possession of the economic benefits derived from scientific knowledge for a defined period of time, thereby allowing ideas to be converted into property rights that will trade efficiently in an open market system.
We will come back to patents again in a moment.
Collective Creativity
In light of these market failures related to Public Goods, one interesting thing to note is that in many ways The Republic of Science was to function effectively by in essence mirroring the methods of free economic markets.
By adjusting their individual efforts to the results achieved and openly published by others, scientists were mutually able to efficiently coordinate progress while maintaining their individual interests and projects.
One can analogize the process to putting together a jigsaw puzzle—in order to put it together in the most efficient manner, you would recruit helpers and divide up the pieces. If each person was left to just focus on their pieces, unlikely they would fit together and unlikely to speed things up beyond what a single individual could. But, if you let the helpers work on their pieces in sight of all the others, each helper will act on his own pieces while responding to the progress of the others. The joint task ends up being greatly accelerated.
The co-ordination of the puzzle builders is guided by an “invisible hand”. And the entire science enterprise moves forward by a network of overlapping spheres of interest that connect physics to chemistry to biology and beyond.
In order for this system of co-ordination by mutual adjustment to work, wide and open sharing of information is required—
In the free economic market, the system of prices causes supply to dynamically adjust to meet demand, but only if the prices are known.
In the Republic of Science, the system of open publication of new knowledge notionally allows the market to move forward. Particularly, the argument goes, when so much of scientific progress occurs by unpredictable steps that may be driven by ideas produced by others.
Consider the effect which the isolation of scientists would have on the progress of science.
Each scientist would go on for a while developing problems derived from the information initially available to all. But these problems would eventualy be exhausted, and in the absence of further information about the results achieved by others, new problems of any value would cease to arise, and scientific progress would come to a standstill.
In the absence of the open sharing of information, the world of science begins to look like our current understanding of the universe, pulling apart at great speed until each galaxy is left in cold and quiet isolation.
1980
In 1980, on the 50th anniversary of the Ransdell Act beginning the rise of publicly funded research:
- The annual budget of the NIH grew from $750,000 to $3 billion;
- Every year during this period the Federal government outspent private industry on R&D; and
- The U.S. government built up a stockpile of approximately 30,000 patents from the work done with these dollars.
The prevailing philosophy at this time with respect to scientific knowledge was that if the federal government paid for it, both it should be shared with the public and the federal government should owned it if it was reduced to the form of a patent. But, at the same time, US private industry was facing severe competition from foreign companies and there was a political concern that the US was losing its competitive edge.
As an example, critics pointed to the fact that only 5% of government-owned patents had actually been licensed for commercial use. Neither the Republic of Science in the form of universities or individual researchers, nor its patron the federal government could capture market value from its work because of the imperative to freely share the knowledge the Republic produced.
This should not come as much of a surprise at this point as it is the classic economic problem of a “Public Good” (non-rival and non-excludable), even with some of these goods converted into patents (because the government proved to not be very good at extracting value from them).
In response to this perceived market failure, the federal government sought to change the social contract with the Republic of Science. The governmental policy shift was encompassed in a range of actions by each branch of the government which collectively produced a profound change in the commercial orientation of US scientists and the institutions where they worked.
Key legislative actions included:
Bayh-Dole Act (1980)
Perhaps the most influential piece of the privatization movement was the University and Small Business Patent Procedure Act, better known as the Bayh Dole Act. The objectives of Bayh-Dole were two-fold:
1.) to “use the patent system to promote the utilization of inventions arising from federally supported research”, and
2.) to “promote collaboration between commercial concerns and nonprofit organizations, including universities.”
The mechanism of action for the Bayh-Dole Act was to give U.S. universities and researchers the right to:
1.) Patent discoveries funded with public dollars, and
2.) License those patents to industry for a profit.
With this one act, the profit motive of rival, excludable goods had been introduced directly into the Republic of Science.
Stevenson-Wydler Act Technology Innovation Act (1980)
Encouraged federal agencies and laboratories to facilitate transfer of technology to the private sector through the creation of Offices of Research and Technology (0.5% of each federal agency budget was to go an ORTA) that could administer agreements such as Cooperative Research and Development Agreements.
R&D Tax Credit (1981)
Designed to stimulate company R&D over time by reducing after-tax costs. Specifically, companies that qualify for the credit could deduct from corporate income taxes an amount equal to 20 percent of qualified research expenses above a base amount. The goal of the credit was to encourage industry to invest more on long-term R&D.
Small Business Innovation Development Act (1982)
Established the Small Business Innovation Research (SBIR) Program within major federal agencies to fund promising research being done by small businesses.
Orphan Drug Act (1983)
An orphan or rare disease is defined as a condition that is diagnosed by fewer than 200,000 individuals in the US. In aggregate, an estimated 25+ million Americans have an orphan disease. The act provides for, among other things, seven-year marketing exclusivity on drugs treating orphan diseases (this longer period of exclusivity is designed to encourage more companies to invest money in research on these conditions), FDA regulatory path relief (to solve the problem that it is difficult to run a large clinical trial if only a small number of patients exist), and tax reductions.
From the judicial branch came one organizational development and one crucial judicial ruling:
US Court of Appeals for the Federal Circuit (1982)
Was established and provided nationwide jurisdiction over patent appeal cases. This created for the first time a judicial body with particular expertise in important questions of intellectual property law.
Diamond v. Chakrabarty, 447 U.S. 303 (1980)
For the realm of life sciences, the Supreme Court added a turbo charge to the policy and objectives of the Bayh-Dole Act with its ruling in this landmark case.
Genetic engineer Ananda Chakrabarty, working for General Electric, had developed a bacterium that was capable of breaking down crude oil which he proposed to use in treating oil spills. He requested a patent for the bacterium from the US Patent and Trademark Office (USPTO), but he was turned down by a patent examiner because the law dictated that living things were not patentable. Chakrabarty sued the USPTO (Diamond was the Commissioner of Patents and Trademarks at the time).
The case worked its way through the judicial system finally reaching the Supreme Court. Chief Justice Warren Burger wrote the opinion for the Supreme Court and stated:
In a 5–4 ruling (with Justices Stewart, Blackmun, Rehnquist, and Stevens joining the Chief Justice in the majority), the court ruled in favor of Chakrabarty, and upheld the patent, writing:
Allowing a patent on a life form proved to be a slippery slope, on the basis of Chakrabarty, in 1985, the USPTO ruled that genetically engineered or altered plants are patentable, and in 1987, the USPTO extended patenting to all altered or engineered animals. Within a few years, microbes, plants, animals, human cells, cell lines, and genes were routinely and in volume being patented.
And finally an executive action that sought to create a more robust intellectual property framework for the country was:
US Patent & Trademark Office Fee-for-Service Program (1991)
Since 1991, USPTO has been fully funded by application fees and maintenance fees that patent holders must pay after 3.5, 7.5, and 11.5 years from the date of any patent.

U.S. Senators Birch Bayh, D-Indiana, & Bob Dole, R-Kansas

Ananda Chakrabarty outside the U.S. Supreme Court
Regime of Technology
The combined effects of this package of privatization moves made by the federal government help lead to the rise of a “Regime of Technology” right in the midst of the Republic of Science.
The Regime was designed to and focused on maximizing private profit from federally funded scientific knowledge as a way to unlock the investment in research made by the government—and in response to the failure of the market to capitalize on the knowledge while it was simply codified in the form of a “Public Good”.
The Republic was being stormed—the science commons was being fenced, information was no longer as free to travel across the land, and since the Republic was based on normative behavior, the norms could change over time. The norms of the Regime of Technology are in many ways the anti-norms of the Republic of Science:
Rather than communalism, private property;
Rather than disinterestedness, interestedness—results are viewed and presented to support a particular point of view in support of private property;
Originality may be OK, but it is often better to be a follower and let others take the risk of being original; and
Rather than skepticism, credulity—there is a great need to believe in order to convince investors and consumers to provide support.
Whatever you think of these normative arguments, the Regime looked on favorably as Bayh-Dole, Chakrabarty, and the other policy changes noted above unleashed a flood of new patents, new companies, and new products — and a shift to private industry funding a larger amount of R&D than the federal government each year.
Academic-Industrial Complex
In our tale of the Republic of Science and the Regime of Technology, after 95 years of significant funding of R&D by the federal government, and after 45 years of universities and other organizations being able to profit from federally-supported research, the Regime of Technology seems to have things firmly in hand.
In many ways, the partnership between academia and the government around the production of scientific knowledge which began with the Ransdall Act has been annexed as subsidiary of private industry. With the government to fund academia in the creation of increasingly applied (mission-centric) scientific knowledge (rather than basic scientific knowledge), which is then appropriated (albeit for a licensing fee) by industry who can reap huge private profits from this scheme.
In this conception of the current system, commercial interests driven by the government as well as industry have changed university research from a publicly funded enterprise performed in order to subsidize the creation of scientific knowledge as a Public Good and undertaken with the Mertonian norms of skepticism, disinterestedness and communalism in the forefront, into one pursued in a far less open manner often primarily to meet the goals of the economic market, which is to say, monetary gain.
In a science world driven almost entirely by applied outcomes, monopoly rights through patents and secrecy as a necessary precursor to the filing of such patents can lead to socially unappealing outcomes:
Intellectual property-based solutions saddle society with the inefficiencies that arise when monopolies (if time-bounded ones created by patents) are tolerated; these are referred to by economists as the “dead-weight burden of monopoly.”
Secrecy practices to protect investments in R&D driven by the methodologies of implementing IP rights (i.e., first to file an idea is given a patent, even if someone else had invented it earlier) create inefficiency in sharing and transfer of knowledge—thus reducing societies ability to efficiently and effectively use its exiting body of knowledge.
Perhaps more troubling in a world ruled by the Regime of Technology:
Less commercially-oriented areas of science languish;
Ideas that have no obvious and immediate commercial value often are not to be pursued; and
Data is increasingly at risk of being manipulated to serve commercial, rather than truth-seeking, ends.
Republic of Science Redux
So, what remains of the Republic of Science? Is it just a fairy tale from a world that no longer exists? Has it truly been subsumed by a Regime of Technology?
To recap the argument a bit:
The Republic of Science is about maximizing the rate of growth of our common stock of knowledge for which purposes public knowledge (a “Public Good”) and hence patronage or public subsidization of scientists is required, because citizens of the Republic of Science cannot capture the social surplus value that their work will yield if they freely share all the knowledge they obtain.
The Regime of Technology is geared to maximizing private gain corresponding to the current and future flows of private profits from existing knowledge and it therefore requires the control of such knowledge through secrecy or exclusive possession of the right to its commercial exploitation.
Juxtaposed to each other like this, I would argue that rather than trying to find ways to make these two worlds collaborate which has been the trend over recent times, we should in fact be focused on maintaining institutional and cultural separation of the realms.
The lure / power of funding from the Regime of Technology will always be strong and the need to migrate knowledge from the Republic outward will also persist.
But what is much harder to protect and promote is the nurturing of non-purely commercial but deeply impactful “Public Good”-based solutions to key societal problems.
I think that more critical in the long run than commercial spin-offs from exploratory science programs are the cumulative indirect effects of these programs in raising the rate of return on private investment in proprietary R&D performed by businesses.
In fact, an alternative explanation had been posed for the rise of private R&D funding beginning in the 1980s is that rather than being a response to government policy changes, it represents an ongoing private investment in “spillover” knowledge generated during the reign of the Republic of Science.
Over time, basic scientific knowledge will raise the rates of return and reduce the riskiness of investing in applied R&D—which is in fact what private stockholders are looking for. The central point that must be emphasized here is that, over the long-run, the fundamental knowledge and practical techniques developed in the pursuit of basic science serves to keep applied R&D as a profitable investment area. These are the characteristics of durability and uncertainty that we touched on briefly earlier.
Mechanism Design Theory
In order to ensure the survival of the Republic of Science, we must maintain our support for the notion of science as a “Public Good” both in the economist’s sense of the phrase and in the common sense of the phrase — a good that has clear value to society and thus deserves to be subsidized in order to ensure its production at a socially optimal level.
In 2007, Leo Hurwicz, Eric Maskin, and Roger Myerson won the Nobel Prize in Economics for their work on an area know as Mechanism Design Theory. The rather clunkily named Mechanism Design Theory involves how to structure economic incentives and institutions to enhance social welfare. It is often described as the “reverse engineering part of economics” as the starting point is an outcome that is being sought, like more scientific research, a more equitable distribution of income, or better funding for education. Then, one works to design a system that aligns private incentive with public goals.
In taking this view, there are specific things that we could do to support the Republic of Science in its traditional mode as a producer of scientific knowledge:
1) Focus public funding on the right science
How: Simply put, the government should be funding that which industry won’t. Thus, reduce government funding of applied research (which industry should fund in any case), while increasing funding of non-mission oriented, basic research—not by reducing the number of dollars appropriated to science, but rather by re-orienting the existing pie to core disciplines such as chemistry, physics, and math, in addition to biology.
The benefit of the spillover of knowledge should be enough over time to fulfill the needs of the ROI crowd. This approach will also help to shift academia back toward the norms described by Merton and away from the challenges of managing being a “partner with industry.”
2) Support (and in fact demand) the open pursuit of science
How: breakdown the power of the for-profit publication industry and more widely disseminate scientific knowledge on an open basis.
3) Limit intellectual property rights
How #1: end the granting of patents (monopolies) on certain basic knowledge such as research tools and techniques.
How #2: provide automatic “fair use” exemptions from the force of IP law to all those engaged in non-commercial scientific research and teaching.
How #3: raise the novelty requirements for patents and award protection only for narrower claims.
How #4: universities could require as part of their basic licensing agreements that licensees make the patent, improvements to the patent, and other related works available to markets that they otherwise would not pursue. (In fact a student-led group called Universities Allied for Essential Medicines has done just this by creating an Equitable or Global Access License).
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