Another interesting feature of the dynamic model is that your ability to make incremental improvements is dramatically improved (as much as 100-fold) compared with investing in short-term research.

My question is: Is anybody else working on dynamic models like this? Do you think it's useful?

Don E. Kash: Yes, there are people working on such models. There is an exponentially increasing community of people who are studying complex systems, and the model you describe is roughly consistent with the themes that are being investigated. I have a 60-page bibliography, if you are interested.

David A. Hounshell: I have been studying the Rand Corporation in Santa Monica as one of the first instances of a think tank, a model for many other nonprofit research organizations that have proliferated since 1945. In 1954, Rand undertook a formal research project on the economics of R&D. By 1956 or 1957, the group, which was led by economist Burton Klein and included other well-known economists such as Richard Nelson and Kenneth Arrow, reached essentially five of your six points, drawing the same conclusions. Since they were focused heavily on military R&D, the only conclusion your group reached that they did not was the importance of the interaction between business and technology. The five other factors were there in their conclusions in 1956-1957.

Eric C. Beckman, University of Pittsburgh: In Professor Hounshell's presentation he noted that DuPont in the 1930s and 1940s had an instinct that research was good. They couldn't put a number on it, but their instinct was that it was important to the company. Somewhere along the line their instincts changed, as represented by the recent spate of downsizing in large chemical R&D organizations, including DuPont. Can you maybe describe how this happened, and will it reverse itself'? If we agree that research is good, then how do we reconcile this statement with the current loss of research jobs? Is it just communication?

David A. Hounshell: In the post-World War II period, DuPont had too many resources, or at least it allocated its resources in the wrong way vis-à-vis research. Taking the path they did, they substantially weakened the connection between research and the business units. By making such a heavy commitment to basic research, the central research unit lost focus and had no support in the business units for any new developments that they might make. The scientists in central research generated many good ideas and did excellent academic-style research, but there was no mechanism for nurturing their discoveries to a commercial product. Because of their experiences in World War II, fueled by the Cold War and the massive government infusion of research funds, they simply overinvested in research.

In 1959 Richard Nelson published what is now the fundamental paper in the economics of innovation, ''Simple Economics of Basic Scientific Research." This paper was partially a response to the crisis that had developed with the launching of Sputnik in 1957. Nelson made a statement in that paper that has become an economic truism—among economists, anyway—that firms, because they cannot capture the full benefits of their investment in basic research, will underinvest in research. So the nation overall will systematically underinvest in research.

What he was arguing was very consistent with what the scientific community was saying in response to Sputnik in 1957: namely, that the reason for the missile gap was that the nation had not invested enough in basic research. We had moved away from basic research. Nelson explained in simple economic terms why the nation had systematically underinvested in basic research. The conclusion is obvious: the public sector needs to make up this difference, because there's a different incentive—it's the public good, social welfare.



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