The Production of Useful Information? In the past, the case for public policy for basic research has been strongly supported by economic analysis. Governments provide by far the largest proportion of the funding for such research in the Organization for Economic Cooperation and Development (OECD) countries. The well-known justification for such subsidy was provided by Nelson (3) and Arrow (4): the economically useful output of basic research is codified information, which has the property of a “public good” in being costly to produce and virtually costless to transfer, use, and reuse. It is therefore economically efficient to make the results of basic research freely available to all potential users. But this reduces the incentive of private agents to fund it, since they cannot appropriate the economic benefits of its results; hence the need for public subsidy for basic research, the results of which are made public.

This formulation was very influential in the 1960s and 1970s, but began to fray at the edges in the 1980s. The analyses of Nelson and Arrow implicitly assumed a closed economy. In an increasingly open and interdependent world, the very public good characteristics that justify public subsidy to basic research also make its results available for use in any country, thereby creating a “free rider” problem. In this context, Japanese firms in particular have been accused of dipping into the world’s stock of freely available scientific knowledge, without adding much to it themselves.

But the main problem has been in the difficulty of measuring the national economics benefits (or “spillovers”) of national investments in basic research. Countries with the best record in basic research (United States and United Kingdom) have performed less well technologically and economically than Germany and Japan. This should be perplexing—even discouraging—to the new growth theorists who give central importance to policies to stimulate technological spillovers, where public support to basic research should therefore be one of the main policy instruments to promote technical change. Yet the experiences of Germany and Japan, especially when compared with the opposite experience of the United Kingdom, suggest that the causal linkages run the other way—not from basic research to technical change, but from technical change to basic research. In all three countries, trends in relative performance in basic research since World War II have lagged relative performance in technical change. This is not an original observation. More than one hundred years ago, de Tocqueville (5) and then Marx (6) saw that the technological dynamism of early capitalism would stimulate demand for basic research knowledge, as well as resources, techniques, and data for its execution.

At a more detailed level, it has also proved difficult to find convincing and comprehensive evidence of the direct technological benefit of the information provided by basic research. This is reflected in Table 1, which shows the frequency with which U.S. patents granted in 1994 cite (i.e., are related to) other patents, and the frequency with which they cite science-refereed journals and other sources. In total, information from refereed journals provide only 7.2% [= 0.9/(10.9+0.9+0.7), from last row of Table 1] of the information inputs into patented inventions, whereas academic research accounts for ≈17% of all R&D in the United States and in the OECD as a whole. Since universities in the USA provide ≈70% of refereed journal papers, academic research probably supplies less than a third of the information inputs into patented inventions than its share of total R&D would lead us to expect.

Furthermore, the direct economic benefits of the information provided by basic research are very unevenly spread amongst sectors, including among relatively R&D-intensive sectors. Table 1 shows that the intensity of use of published knowledge is particularly high in drugs, followed by other chemicals, while being virtually nonexistent in aircraft, motor vehicles, and nonelectrical machinery. Nearly half the citations journals are from chemicals, ≈37.5% from electronic-related products and only just over 5% from nonelectrical machinery and transportation. And in spite of this apparent lack of direct